Falling rate of profit (18TH-19TH CENTURY)

Falling rate of profit was held by all leading classical economists except the English writer Thomas De Quincey (1785-1859). Scottish economist Adam Smith (1723-1790) regarded the decline in profit as a result of ‘the competition of capitals’ whereas English economist David Ricardo (1772-1823) noted that diminishing returns in agriculture raised the real wage and reduced profits with which wages were

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Fine tuning (1960S)

Fine tuning is attributed to American economist Walter Heller (1915-1987), and is used to refer to a short-run interventionist approach to the economy using monetary and fiscal policies to control fluctuations in demand. A popular policy of British governments from 1945 to 1970, it involved altering fiscal policy continually to stabilize national income as close to its full-employment

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Fixed point theorems (1910)

First used in economic analysis by Hungarian-born mathematical economist John von Neumann (1903-1957) in 1937, as an extension of the mapping techniques developed earlier by German mathematician Luitzen Egbertus Jan Brouwer; fixed point theorems represent a macroeconomic approach setting out specific targets with regard to the aims of full employment, price stability, economic growth and balance of

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Forced saving (1912)

Given its current name by Austrian economist Ludwig von Mises (1881-1973), forced saving refers to an an involuntary reduction in consumption which arises when an economy is in full employment and when it has an excess supply of loans. The excess depresses the market rate of interest and stimulates demand for investment finance which precipitates general

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Free banking theory (19TH CENTURY)

A liberal approach to banking in the USA adopted by the New York legislature in 1838 and later extended to other states through the National Bank Act, 1863. Free banking theory maintained that the banking system should be open to all and not dependent on legislative approval, provided certain minimum deposit requirements are met.

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Free rider problem

The free rider problem exists when people enjoy the benefits of government provided goods independent of whether they pay for them. In the analyses of economics and political science, free riders are actors who take more than their fair share of the benefits or do not shoulder their fair share of the costs of

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Fundamental disequilibrium (1945)

The term fundamental disequilibrium was first used by the International Monetary Fund to describe a situation in which a persistent discrepancy exists between the official exchange rate of a currency and its actual purchasing power. When national inflation rates vary, official rates of exchange will no longer mirror the value of a currency and

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Game theory (20TH CENTURY)

Account of politics using the analogy of competitive games. Individuals and institutions pursue their rationally predicted maximum self-interests. They do so in a manner analogous to games players trying to calculate not only their own advantages, but the likely moves of their opponents. The result, paradoxically, is frequently neither the maximum individual nor the

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General equilibrium theory (19TH CENTURY- )

First developed by French-born economist Leon Walras (1834-1910), general equilibrium theory studies simultaneous equilibria in a group of related markets. Attributed to Walras, who studied a theoretical economic system in which all consumers were utility maximizers and firms were perfectly competitive, the model shows that a unique stable equilibrium can exist under such conditions. Economists have since

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General strike (20TH CENTURY)

Theory of political action of French writer on syndicalism Georges Sorel (1847-1922). Capitalism would be overthrown by the economic rather than the political actions of the working class. This revolutionary economic activity would be carried out in pursuit of the ultimate ideal of a universal, general strike. But the purpose of advocating such a strike was not

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General theory of employment, interest and money (1936)

The title of a book by English economist John Maynard Keynes (1883-1946), general theory of employment, interest and money represents a major contribution to modern economic thought. It attacked classical economics and put forward important theories on the consumption function, aggregate demand, the multiplier, marginal efficiency of capital, liquidity preference and expectations. Also see: absolute income hypothesis, aggregate demand theory, demand for

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Gibrat’s rule of proportionate growth (1931)

Named after French economist ROBERT GIBRAT (1904-1980) (and sometimes called Gibrat’s Law), Gibrat’s rule of proportionate growth states that the proportional change in the size of a company in an industry is the same for all such companies irrespective of their original size. If a company with sales of $10m doubles in size over

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Giffen paradox (C.1895)

Proposed by Scottish economist Sir Robert Giffen (1837-1910) from his observations of the purchasing habits of the Victorian poor, Giffen paradox states that demand for a commodity increases as its price rises. Giffen paradox is explained by the fact that if the poor rely heavily on basic commodities like bread or potatoes, when prices are low

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Golden rule of capital accumulation (1961)

A term used by English economist ERNEST PHELPS (1906-1994), golden rule of capital accumulation analyzes the best plan of economic growth which will give the optimal sustained level of consumption per capita in an economy. It is assumed that each generation will save for future generations a proportion of the income which was in

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Gravity model (1947)

Developed by American astronomer James Stewart, gravity model is an examination of the interaction between two places relating to size, distance and importance. The relationship between the two places is seen as corresponding directly to product, and inversely to distance. The gravity model is used in regional economics and transport studies. However, it is

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Gresham’s law (19TH CENTURY)

Usually attributed to English businessman Sir Thomas Gresham (1519-1579), Gresham’s Law is often summarized as ‘Bad money drives out good.’ Gresham’s observation concerned the likelihood that coins with bullion content equal or higher than their face value would be removed from circulation and melted down, leaving in circulation only coins with a metal value

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Group theory (19TH CENTURY)

Developed by Norwegian mathematician Marius Spohus Lie (1842-1899) and later adopted by modern economists, group theory is a method of analyzing invariant relationships among economic variables where often the relationships are represented by differential equation systems. Source: R Sato, Theory of Technical Change and Economic Invariance: Application of Lie Groups (New York, 1981) Main

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Growth of the firm (1959)

Posited by British economist EDITH PENROSE (1914-1996) and forming part of managerial theories of the firm, theory of the growth of the firm relates to economic expansion due to processes taking place within the firm. Managers are presumed to reach their optimal rates of power and prestige by following a path towards product excellence and

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Growth pole theory

Rooted in the work of English economist and academic Sir William Petty (1623-1687), and associated with French economist François Perroux (1903-1987), growth pole theory refers to the grouping of industries around a central core of other industries whose actions act as a catalyst to growth in the area. Although growth pole theory does not include geographical concentration of

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Harrod-Domar growth model (20TH CENTURY)

Named after English economist Roy Harrod (1900-1978) and Polish-born American economist Evsey Domar (1914-1997), Harrod-Domar growth model postulates three kinds of growth: (1) warranted growth (the rate of output at which firms feel they have the right level of capital and do not wish to expand or decrease investment); (2) natural rate of growth (corresponding to growth in

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