Quantity theory of money (1885)

Developed by the Americans SIMON NEWCOMB (1835-1909) and Irving Fisher (1867-1947), the latter of whom’s original equation stated in simple terms that the amount of money in circulation equals money national income; that is, MV = PT where M is money stock, V is velocity of circulation, P is average price level and T the number of

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Queuing theory (1970S)

Developed as an extension of probability theory, queuing theory deals with the analysis of congestion and delay in economic modeling. Queuing theory features in stock control in the shape of the Lifo (Last in first out) and Fifo (First in first out) principles, and in financial markets. Also see: information theory Source: D Gross and

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Raising the Value of Money

by John Locke Further Considerations Concerning Raising the Value Of Money Wherein Mr. Lowndes’s Arguments for it in his late Report concerning An Essay for the Amendment of the Silver Coins, are particularly Examined. The Second Edition Corrected, London, 1696 To the Right Honorable Sr John Sommers, Kt. Lord Keeper of the great Seal

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Ramsey pricing (1927)

Named after English economist Frank Ramsey (1903-1960), Ramsey pricing is concerned with prices that maximize the sum of industry consumer surplus and profits. Also see: average cost pricing, marginal cost pricing, cost-push inflation Source: F Ramsey, ‘A Contribution to the Theory of Taxation’, Economic Journal, 37 (March, 1927), 47-61 Description In a first-best world, without the need to earn

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Random walk hypothesis (1900)

First identified by French economist Louis Bachelier (1870-1946) from the study of the French commodity markets, random walk hypothesis asserts that the random nature of commodity or stock prices cannot reveal trends and therefore current prices are no guide to future prices. The short-term unpredictability of factors means that they appear to walk randomly on a

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Rational expectations theory (1960)

Formulated by American economist John Muth (1930- ), rational expectations theory states that individuals and companies, acting with complete access to the relevant information, forecast events in the future without bias. Errors in their forecasts are assumed to result from random events. Rational expectations theory has emerged as an important aspect of new classical economics. Also see: adaptive

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Rationing (20TH CENTURY)

Rationing is a deliberate attempt, frequently undertaken by governments, to allocate scarce supplies in the face of high demand. Severe rationing during the 1940s, 1950s and 1970s prompted American and European economists to study this subject and its consequences for product substitution. Rationing does not exist in a free market because the excess demand

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Raul Prebisch

Argentinian economist at the United Nations Commission for Latin America (UNCLA) and later at UNCTAD, credited with having developed the dependency thesis of economic development theory. Essentially, Raul Prebisch argued that the colonial enterprise and international trade had not been necessarily useful for economic development – as the earlier theorists might imply. Rather, by changing and

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Rawls theory of justice (1972)

Named after the American philosopher John Rawls (1921-2002), Rawls theory of justice sees justice as fairness, and its intuitive idea is that the well-being of society depends on cooperation. It is based on the traditional theories of social contract as represented by English philosopher John Locke (1632-1704), Swiss philosopher Jean-Jacques Rousseau (1712-1778) and the German philosopher Immanuel Kant (1724-1804). Also see: entitlement theorem

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Reaganomics

Named after ex-actor and former American president Ronald Reagan (1911-2004), who was an advocate of supply-side economics. Reagan stressed the need to reduce taxes, deregulate the economy and modernize US defence as part of his policy. The monetarist economist Milton Friedman (1912-1992) acted as his policy adviser (1981-1990), and Reagan followed a domestic policy of tax reduction and deficit financing.

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Real bills doctrine (18TH CENTURY)

Developed by Scottish economist Adam Smith (1723-1790), real bills doctrine asserts that there can never be an inflationary excess issue of commercial bills and other paper money because each bill represents a real transaction. Real bills doctrine was later criticized for failing to recognize that the same sum of money can support many bills. Source: A

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Regulation (19TH CENTURY- )

Regulation describes government intervention in the price, sale and production decisions of a firm. Regulation is often a response to chaotic growth, abuses of monopoly powers and price-fixing, and is seen as a method of consumer protection. Also see: laissez-faire, physiocracy, mercantilism, economic liberalism, new classical macroeconomics Source: M A Utton, The Economics of Regulating Industry (Oxford, 1986) Social

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Regulatory capture

An organization’s evasion of control by a regulatory body, often an anti-trust or takeover body. Organizations will attempt to dilute the effectiveness of regulatory bodies through political control, and by developing superior information and more effective staff. Theory Interstate Commerce Commission (ICC) as Barrier-to-Competition: Applications-to-Operate vs In-Operation For public choice theorists, regulatory capture occurs because

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Relative income hypothesis (1949)

Proposed by JAMES STEMBLE DUESENBERRY (1918- ) but subsequently overtaken by other studies on the behavior of saving and consumption, relative income hypothesis states that an individual’s attitude to consumption and saving is guided more by his income in relation to others than by an abstract standard of living. ‘Keeping up with the Joneses’

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Rent seeking (1974)

The term rent seeking was first used by American economist ANN KRUEGER (1934- ) for a theory developed by American economist GORDON TULLOCK (1922-) in 1967. TULLOCK’s theory addressed the active creation of monopolies, with the aim of achieving supernormal profits or market control, in competitive conditions. Also see: monopoly, monopolistic competition Source: A O Krueger,

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Returns to scale (18TH CENTURY- )

The long-term relationship between outputs and the amount of inputs required to generate them. If inputs are increased by half, economies of scale occur where a higher proportionate increase in production is achieved. Diseconomies of scale occur where output is increased by less than half. Classical economists were preoccupied with the diminishing returns to

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Resource dependence theory

Resource dependence theory (RDT) is the study of how the external resources of organizations affect the behavior of the organization. The procurement of external resources is an important tenet of both the strategic and tactical management of any company. The basic argument of resource dependence theory can be summarized as follows: Organizations depend on resources.

Resource-based theory

According to resource-based theory, organizations that own “strategic resources” have important competitive advantages over organizations that do not. Some resources, such as cash and trucks, are not considered to be strategic resources because an organization’s competitors can readily acquire them. Instead, a resource is strategic to the extent that it is valuable, rare, difficult

Revealed preference theory (1938)

Pioneered by American economist Paul Samuelson (1915- ), revealed preference theory is a method by which it is possible to discern consumer behavior on the basis of variable prices and incomes. A consumer with a given income will buy a mixture of products; as his income changes, the mixture of goods and services will also change.

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Ricardian equivalence theorem (1974)

Named by American economist Robert Barro (1944- ) after English economist David Ricardo (1772-1823), Ricardian equivalence theorem asserts that government deficits are anticipated by individuals who increase their saving because they realize that borrowing today has to be repaid later. One of the theory’s central points is that the individual can unravel government policy. Also see: crowding out Source:

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