Segmented labor market theory (1970S)

The labor market consists of various sub-groups which have little crossover capability. Wage determination differs from group to group. A common example is dual labor market theory. Also see: crowding hypothesis Source: F Wilkinson, ed., The Dynamics of Labor Market Segmentation (New York, 1981) Neoclassical economics The theory of labor market segmentation contrasts with neo-classical economic theory,

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Shadow pricing (1970S)

Use of linear programming techniques in situations in which a price cannot be charged or where the price does not reflect the effort made in producing the good. In general this policy attempts to achieve an optimum allocation of resources in the absence of an effective price system. Also see: cost-benefit analysis, opportunity cost Source: I

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Signalling (1970S)

The provision of information for decision-making, especially regarding price. Price changes signal producers that supply and demand are no longer in equilibrium. Also see: adverse selection Source: A M Spence, Market Signalling: Information Transfer in Hiring and Related Processes (Cambridge, Mass., 1973) Introductory questions Signalling started with the idea of asymmetric information (a deviation from perfect information), which

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Slutsky’s theorem (1915)

Named after its proposer, Soviet economist Eugen (Evgeny) Slutsky (1880-1948), Slutsky’s theorem was later developed by English economists John Hicks (1904-1989) and ROY ALLEN (1906-1983). In its simplest form: Price effect = income effect + substitution effect Slutsky asserted in 1915 that demand theory is based on the concept of ordinal utility. This idea was developed by Hicks who separated the

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Small is beautiful principle (1973)

Developed by the German-born British economist and businessman ERNST SCHUMACHER (1911-1977), who advocated ‘intermediate’ and alternative technologies. The principle challenged the tradition of large organizations, which Schumacher claimed were inefficient and a danger to the environment. He proposed small working units, communal ownership, and the use of local labor and resources. He placed the

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Social welfare function (1938)

Introduced by American economist ABRAM BERGSON (1914-2003) as a rejection of the cardinal utility approach to welfare economics, social welfare function is understood as meaning the determination of a society’s taste for different economic states. There are two approaches to the welfare function: first, that it is an imposed structure; second, that it devises

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Solow economic growth (1970S)

Named after American economist Robert Solow (1924- ), Solow economic growth highlights the relationship of technological change to growth. As the rate of return falls, firms turn to more capital intensive methods of production; therefore the rate of investment increases. However, it is possible to show a situation in which the rate of return would be

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Specie flow mechanism

Outlined by Scottish philosopher David Hume (1711-1776), among others, as an argument against the Mercantilist view that a nation should have a permanent balance of payments surplus. Specie flow mechanism is a corrective mechanism in the Gold Standard by which deficits and surpluses are eliminated by an induced flow of specie. In its earliest form (as

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Stationary state (1776)

Referred to by Scottish economist Adam Smith (1723-1790), stationary state is a situation of zero growth in which the stock of goods is always the same (that is, quantity consumed equals quantity supplied in the same time period) and rewards to factors of production are at a minimum. Also see: secular stagnation theory, malthusian population theory Source: A

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Stock flow analysis

Analysis of the behavior of individuals or markets at a fixed point in time, and over periods of time. The technique is increasingly used in the study of employment. Also see: unemployment Source: D W Bunshaw and R W Glower, Introduction to Mathematical Economics (Homewood, III., 1957) Economics, business, accounting, and related fields often distinguish between

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Structure conduct performance theory (20TH CENTURY)

Structure conduct performance theory is a model used to link elements of market structure to business conduct and performance in industrial economics. The structure–conduct–performance (SCP) paradigm, first published by economists Edward Chamberlin and Joan Robinson in 1933,[1] and developed by Joe S. Bain is a model in Industrial Organization Economics which offers a causal theoretical explanation for firm performance through economic conduct on incomplete markets.

Substitution theory (20TH CENTURY)

A fundamental part of modern economic theory developed by, among others, Soviet economist Eugen Slutsky (1880-1948) and English economist John Hicks (1904-1989); substitution theory is the analysis of the manner in which consumers, faced with a constant level of real income, change purchasing decisions in the wake of price changes. Also see: Slutsky’s theorem Source: J R Hicks and

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Sunspot theory (1884)

Advanced by English economist WILLIAM JEVONS (1835-1882), sunspot theory is a trade cycle theory stating that trade is linked to the regular occurrence of solar flares, or spots, which affect the earth’s climate and agricultural output. Critics, while acknowledging the cyclical nature of the sunspot activity and that of agricultural production, view the theory as unduly

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Supply-side economics (20TH CENTURY)

With its emphasis on aggregate supply, rather than aggregate demand (as in Keynesian economics), supply-side economics is concerned with the productive capacity of the economy. Free market supply-side economics emerged in the 1980s as the complement to monetarism. Government measures included: tax cuts; measures to facilitate the mobility of labor; reduction in public expenditure; and deregulation.

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Surplus value (19TH CENTURY)

Cited by English economist David Ricardo (1772-1823) and German political economist Karl Marx (1818-1883), surplus value describes the surplus derived from the use of a factor of production over its cost. Marx noted that an employee works more hours than is necessary to provide basic subsistence for himself and his family, thereby creating a surplus, or profit. Also see: theories

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Syndicalism (19TH CENTURY- )

Theory of direct working class or trade union power, founded in the theories of French social philosopher Georges Sorel (1847-1922). Since political power arises from economic power, capitalism is most effectively replaced by workers organizing on the basis of their occupation or workplace, and then using their economic power either through strikes or occupations. A popular movement in

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Tax incidence

First discussed by the Physiocrats in France, tax incidence is the analysis of the effect of a particular tax on the distribution of economic welfare. Tax incidence also refers to the ultimate payer of a tax. If a government increases tax on petrol, oil companies may absorb it if competition is intense or they

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Technological gap theory

Technological gap theory proposes that changes in international trade are dictated by the relative technological sophistication of countries. Some nations, such as the US or Japan, have a competitive trade advantage because of their ability to innovate. Over time, other countries will bridge a particular gap although the really innovative will have opened others.

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Term structure of interest rates

Term structure of interest rates refers to the relationship between the fixed amount of interest paid on a financial security (such as a government or corporate bond) and the amount of time before the bond reaches its maturity date. Early work on this theory of expectations was carried out by US economist Irving Fisher (1867-1947) and

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Theories of profits (19TH CENTURY- )

The early classical economists believed that profits would eventually decline. The Scottish economist Adam Smith (1723-1790) viewed the growth rate of capital accumulation (which took place at a rate higher than total output) as the cause. The English economist David Ricardo (1772-1823) argued that a decline in the general rate of profit was caused by the diminishing marginal

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