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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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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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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Roundabout method of production (1889)

Advanced by Austrian economist EUGEN VON BOHM-BAWERK (1851-1914), roundabout method of production describes the use of capital goods to increase future productivity of the factors of production. Production efficiency often entails diverting labour and capital away from the immediate method of production in order to achieve a better method. A house painter may paint

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Rybczynski theorem (1955)

Named after Polish-born English economist TADEUSZ RYBCZYNSKI (1923-1998), Rybczynski theorem posits that when one of two factors of production is increased there is a relative increase in the production of the good using more of that factor. This unfortunately leads to a corresponding decline in that good’s relative price. Also see: Heckscher-Ohlin trade theory Source:

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Satisficing

Satisficing is the pursuit by a firm of satisfactory profits instead of maximum profit because the company has as its goal some other objective such as maximum market share, sales or management satisfaction. The concept of ‘satisfactory’ profits is subjective and varies from firm to firm. Also see: theory of the firm, theory of the growth

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Say’s law (1803)

Also known as Say’s law of markets. Named after Jean-Baptiste Say (1767-1832), Say’s law argued that an economy is self-regulating provided that all prices, including wages, are flexible enough to maintain it in equilibrium. In a more simplistic, and somewhat inaccurate form, Say’s law states that supply creates its own demand and over-production is impossible. This theory

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Scitovsky paradox

Named after the Hungarian-born American economist TIBOR SCITOVSKY (1910-2002), Scitovsky paradox states that in welfare economics there is no increase in social welfare by a return to the original part of the losers. If Allocation X is changed to Allocation Y, those who suffer in the move could still gain enough by returning to

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Screening hypothesis

Screening hypothesis maintains that education is a filter, or screen, by which innate talent is identified. The purpose of education is seen as confirmation of an individual’s capability to be trained on the job rather than the conferring of skills to a worker. It is used as an alternative to human capital theory. Also

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Search theory (1962)

Search theory is the analysis of how buyers and sellers acquire information about market conditions and how potential market participants are brought together. Its application to labor markets was pioneered by the American economist GEORGE STIGLER (1911-1991). Search theory recognizes the principle that both employers and workers need to invest time and other resources

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Secular stagnation theory (20TH CENTURY)

Analysis of a protracted economic depression characterized by a falling population growth, low aggregate demand and a tendency to save rather than invest. The bulk of modern economic endeavour has been to avoid this depression or to curb the impact of it on people. Some recent theorists have suggested that stagnation is a desirable

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