Pareto efficiency

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The Inner Lives of Markets: How People Shape Them—And They Shape Us by Tim Sullivan

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Most memorably, though, he used his mathematical skills to extend Smith’s invisible hand arguments, introducing a particular criterion by which economists could assess social well-being.5 This welfare principle, named Pareto efficiency by British economist I. M. D. Little, suggests that we may judge an economic system by whether it’s possible, through some series of trades or exchanges, to make at least one individual better off without making anyone worse off. This is a fairly minimalist view on social welfare—for example, if a tax policy brought millions of people out of poverty but in the process left Donald Trump with ten fewer dollars in his bank account, it would fail to be a Pareto improvement because someone—even someone as rich and odious as Trump—is made worse off. But that also means that Pareto improvements should be changes that everyone can agree on because, by definition, everyone is better off. It is exactly this type of work that served as a bridge between Smith’s stories and the mathematical economists of the twentieth century who took Pareto’s work and showed, rigorously, that efficient markets are Pareto optimal (i.e., no two market participants can improve their lot through further exchange, once the economy is up and running).6 The worldly philosophers created a set of conjectures and principles.

But that also means that Pareto improvements should be changes that everyone can agree on because, by definition, everyone is better off. It is exactly this type of work that served as a bridge between Smith’s stories and the mathematical economists of the twentieth century who took Pareto’s work and showed, rigorously, that efficient markets are Pareto optimal (i.e., no two market participants can improve their lot through further exchange, once the economy is up and running).6 The worldly philosophers created a set of conjectures and principles. Their mathematical descendants gave these ideas precision, which allowed them to glean further insights and predictions from their models. Radford—with his mathless assessment of Stalag VII-A’s market—was engaged more in an economics that was soon (perhaps sadly) to become a thing of the past. His story about the value created by markets was intimately linked to the long-running debate among nineteenth-century economists (and still going on during Radford’s grad school days) on where value comes from.

In a mostly adoring profile in the Quarterly Journal of Economics in 1949, Joseph Schumpeter still called Pareto’s work “far from faultless,” before describing his theory of money as “inferior” and noting that Pareto’s “theory of monopoly cannot, I believe, be salvaged by even the most generous interpretation.” 6. Pareto, who in his earlier life often railed against antimarket policies like import tariffs, was far from a blind adherent to free-market ideology. In fact, in his Manuele di economia politica, Pareto presents underinvestment in railroads as a clear violation of Pareto optimality that would occur if infrastructure construction were left in the hands of private business. 7. Marx wasn’t implying that customer value or preferences were irrelevant. His was a model where price was an outcome that would, in market equilibrium, be defined by labor inputs. As Etsy sellers can attest, Marx’s model doesn’t seem to pan out in reality. 8. One notable exception who continues to have an outsized influence was Friedrich Hayek, an Austrian-born economist who took up a post at the London School of Economics in 1931.


pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

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If Gates objected to taking even $100 of his wealth and redistributing it to somebody poorer, forcing through such a change would hurt at least one person, Gates, and it wouldn’t be a Pareto improvement.* Given the Pareto criterion’s failure to deal with issues of equity, many liberal thinkers are understandably skeptical about using it as a policy guide. An economy can be Pareto-efficient “even when some people are rolling in luxury and others are near starvation as long as the starvers cannot be made better off without cutting into the pleasures of the rich,” the noted Indian economist Amartya Sen, now of Harvard, has pointed out. “In short, a society or an economy can be Pareto optimal and still be perfectly disgusting.” Despite its shortcomings, however, Pareto efficiency remains a useful concept—if only to check on whether things are going wrong. If an economic outcome isn’t Pareto-efficient, something is preventing mutually beneficial transactions from taking place.

E is superior to D: I am better off, and you are no worse off. Modern economists refer to a shift from A to B, or from D to E, as a “Pareto improvement,” and they define an economic outcome in which all such moves have been exhausted as “Pareto-efficient.” If a situation is Pareto-efficient, it is impossible to make anybody better off without making somebody else worse off. Returning to the example involving wages, imagine there is another outcome, C, in which you get paid $800 a month, a $50 increase over your wage in B. But for that to happen, my wage has to fall from $1,000 to $975 a month. Moving from B to C would be good news from your perspective, but not from mine: it is not a Pareto improvement. One way to think about Pareto efficiency is as a minimum requirement for any satisfactory economic outcome. It’s obviously desirable because it means mutually advantageous options aren’t wasted, but in other ways it doesn’t take us very far.

It’s obviously desirable because it means mutually advantageous options aren’t wasted, but in other ways it doesn’t take us very far. For one thing, Pareto-efficient outcomes are rarely unique. Going back to our original example, in which you earn $500 a week and I earn $1,000, any alternative that raises both our salaries is a Pareto improvement, but how would we choose between an option in which you got a raise of a hundred dollars and I got a raise of ten dollars, and another option in which your raise was ten dollars and mine was a hundred dollars? Pareto efficiency doesn’t provide an answer. Its inability to weigh gains and losses also means it can’t rule out some very bad outcomes. If Bill Gates owned 99 percent of the world’s wealth and everybody else owned 1 percent, the allocation could well be Pareto-efficient. If Gates objected to taking even $100 of his wealth and redistributing it to somebody poorer, forcing through such a change would hurt at least one person, Gates, and it wouldn’t be a Pareto improvement.* Given the Pareto criterion’s failure to deal with issues of equity, many liberal thinkers are understandably skeptical about using it as a policy guide.


pages: 153 words: 12,501

Mathematics for Economics and Finance by Michael Harrison, Patrick Waldron

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Brownian motion, buy low sell high, capital asset pricing model, compound rate of return, discrete time, incomplete markets, law of one price, market clearing, Myron Scholes, Pareto efficiency, risk tolerance, riskless arbitrage, short selling, stochastic process

Finally, we confirm that utility is maximised by the given Pareto efficient allocation, X∗ , at these prices. As usual, the proof is by contradiction: the details are left as an exercise. Q.E.D. 4.8.6 Complete markets The First Welfare Theorem tells us that competitive equilibrium allocations are Pareto optimal if markets are complete. If there are missing markets, then competitive trading may not lead to a Pareto optimal allocation. We can use the Edgeworth Box diagram to illustrate the simplest possible version of this principle. 4.8.7 Other characterizations of Pareto efficient allocations There are a total of five equivalent characterisations of Pareto efficient allocations. Theorem 4.8.4 Each of the following is an equivalent description of the set of allocations which are Pareto efficient: 1. by definition, feasible allocations such that no other allocation strictly increases at least one individual’s utility without decreasing the utility of any other individual; 2. by the Welfare Theorems, equilibrium allocations for all possible distributions of the fixed initial aggregate endowment; 3. in two dimensions, allocations lying on the contract curve in the Edgeworth box; Revised: December 2, 1998 CHAPTER 4.

WLOG we can rank the states so that Yi < Yj if i < j. We now present some results, following ?, showing conditions under which trading in a state index portfolio and in options on the state index portfolio can lead to the Pareto optimal complete markets equilibrium allocation. Now consider completion of markets using options on aggregate consumption. In real-world markets, the number of linearly independent corporate securities is probably less than M . However, options on corporate securities may be sufficient to form complete markets, and thereby ensure allocational (Pareto) efficiency for arbitrary preferences. Further assume that ∃ M − 1 European call options on Y with exercise prices Y1 , Y2 , . . . , YM −1 . A European call option with exercise price K is an option to buy a security for K on a fixed date.

Revised: December 2, 1998 61 63 . . . . . . . . . . 63 . . . . . . . . . . 63 . . . . . . . . . . 66 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 . 69 . 70 . 71 . 72 . 73 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 75 78 78 78 CONTENTS 4.8 4.9 iii 4.7.3 Existence of equilibrium . . . . . . . . . . . . . . . The Welfare Theorems . . . . . . . . . . . . . . . . . . . . 4.8.1 The Edgeworth box . . . . . . . . . . . . . . . . . . 4.8.2 Pareto efficiency . . . . . . . . . . . . . . . . . . . 4.8.3 The First Welfare Theorem . . . . . . . . . . . . . . 4.8.4 The Separating Hyperplane Theorem . . . . . . . . 4.8.5 The Second Welfare Theorem . . . . . . . . . . . . 4.8.6 Complete markets . . . . . . . . . . . . . . . . . . 4.8.7 Other characterizations of Pareto efficient allocations Multi-period General Equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 78 78 78 79 80 80 82 82 84 5 CHOICE UNDER UNCERTAINTY 85 5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 5.2 Review of Basic Probability . . . . . . . . . . . . . . . . . . . . 85 5.3 Taylor’s Theorem: Stochastic Version . . . . . . . . . . . . . . . 88 5.4 Pricing State-Contingent Claims . . . . . . . . . . . . . . . . . . 88 5.4.1 Completion of markets using options . . . . . . . . . . . 90 5.4.2 Restrictions on security values implied by allocational efficiency and covariance with aggregate consumption . . . 91 5.4.3 Completing markets with options on aggregate consumption 92 5.4.4 Replicating elementary claims with a butterfly spread . . . 93 5.5 The Expected Utility Paradigm . . . . . . . . . . . . . . . . . . . 93 5.5.1 Further axioms . . . . . . . . . . . . . . . . . . . . . . . 93 5.5.2 Existence of expected utility functions . . . . . . . . . . . 95 5.6 Jensen’s Inequality and Siegel’s Paradox . . . . . . . . . . . . . . 97 5.7 Risk Aversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 5.8 The Mean-Variance Paradigm . . . . . . . . . . . . . . . . . . . 102 5.9 The Kelly Strategy . . . . . . . . . . . . . . . . . . . . . . . . . 103 5.10 Alternative Non-Expected Utility Approaches . . . . . . . . . . . 104 6 PORTFOLIO THEORY 6.1 Introduction . . . . . . . . . . . . . . . . . . . 6.2 Notation and preliminaries . . . . . . . . . . . 6.2.1 Measuring rates of return . . . . . . . . 6.2.2 Notation . . . . . . . . . . . . . . . . 6.3 The Single-period Portfolio Choice Problem . . 6.3.1 The canonical portfolio problem . . . . 6.3.2 Risk aversion and portfolio composition 6.3.3 Mutual fund separation . . . . . . . . . 6.4 Mathematics of the Portfolio Frontier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 105 105 105 108 110 110 112 114 116 Revised: December 2, 1998 iv CONTENTS The portfolio frontier in <N : risky assets only . . . . . . . . . . . . . . . 6.4.2 The portfolio frontier in mean-variance space: risky assets only . . . . . . . . . . . . . . . 6.4.3 The portfolio frontier in <N : riskfree and risky assets . . . . . . . . . . . 6.4.4 The portfolio frontier in mean-variance space: riskfree and risky assets . . . . . . . . . . .

Culture and Prosperity: The Truth About Markets - Why Some Nations Are Rich but Most Remain Poor by John Kay

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Albert Einstein, Asian financial crisis, Barry Marshall: ulcers, Berlin Wall, Big bang: deregulation of the City of London, California gold rush, complexity theory, computer age, constrained optimization, corporate governance, corporate social responsibility, correlation does not imply causation, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Donald Trump, double entry bookkeeping, double helix, Edward Lloyd's coffeehouse, equity premium, Ernest Rutherford, European colonialism, experimental economics, Exxon Valdez, failed state, financial innovation, Francis Fukuyama: the end of history, George Akerlof, George Gilder, greed is good, Gunnar Myrdal, haute couture, illegal immigration, income inequality, industrial cluster, information asymmetry, intangible asset, invention of the telephone, invention of the wheel, invisible hand, John Meriwether, John Nash: game theory, John von Neumann, Kenneth Arrow, Kevin Kelly, knowledge economy, labour market flexibility, late capitalism, light touch regulation, Long Term Capital Management, loss aversion, Mahatma Gandhi, market bubble, market clearing, market fundamentalism, means of production, Menlo Park, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Naomi Klein, Nash equilibrium, new economy, oil shale / tar sands, oil shock, Pareto efficiency, Paul Samuelson, pets.com, popular electronics, price discrimination, price mechanism, prisoner's dilemma, profit maximization, purchasing power parity, QWERTY keyboard, Ralph Nader, RAND corporation, random walk, rent-seeking, Right to Buy, risk tolerance, road to serfdom, Ronald Coase, Ronald Reagan, second-price auction, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, Steve Jobs, telemarketer, The Chicago School, The Death and Life of Great American Cities, The Market for Lemons, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, total factor productivity, transaction costs, tulip mania, urban decay, Vilfredo Pareto, Washington Consensus, women in the workforce, yield curve, yield management

And Pareto developed a further twist to this argument. If no Pareto improvement is possible-if it is not possible to make the ] oneses better off without making the Smiths worse off, or vice versa, then the outcome is described as Pareto efficient.6 An allocation of scarce resources between competing ends is Pareto efficient if it is impossible to make one household better off without making another household worse off It is hard not to be in favor of Pareto improvement. A Pareto improvement is the politician's dream-a policy from which there are only winners. If you could make someone better off without making anyone else worse off, wouldn't you do it? And yet you may already have a sense that Pareto is about to lead you somewhere you may not wish to go. A state of affairs might be Pareto efficient, and yet deplorable. A sadist is torturing his victims.

But this outcome could still be Pareto efficientwe can only stop the torture by making the sadist worse off The Fundamental Theorems of Welfare Economics Any exchange that benefits both parties and has no adverse effect on anyone else is a Pareto improvement. So an economic system can be efficient only if every possible mutually beneficial trade has occurred. This seems to link Pareto efficiency with free, competitive markets. Allowing the market economy to function freely will have the result that people will trade with each other until Pareto efficiency is achieved. For many supporters of the market economy, the argument is as simple as that. I've heard it often from practitioners of DIY economics. It isn't as simple as that. Voluntary trade between two individuals benefits both. But it will only be a Pareto improvement if it has no adverse consequences for other people. If my purchase, or your {194} John Kay production, affects others, it will not lead to a Pareto improvement. And it will often affect others because others want to buy the same goods as I do, or your output raises the costs of a third party.

When a plane is about to depart with an empty seat, it would be a Pareto improvement if the seat was filled by a passenger willing to pay anything at all. But the airline won't do this, because if seats were regularly available for next to nothing whenever one was empty, this would affect the behavior of full-fare-paying passengers. Airlines have the sophisticated yield management systems of chapter 12 to handle precisely this problem. Their aim is not to fill the plane, but to strike a balance between filling seats and obtaining good prices for seats. If they could read minds and gauge exactly how much each passenger would be willing to pay, they could engage in perfect price discrimination 7 and achieve Pareto efficiency. But of course they can't. So free trade leads to Pareto efficiency only in perfectly competitive markets because only perfectly competitive markets are free of these incentive compatibility problems.


pages: 339 words: 105,938

The Skeptical Economist: Revealing the Ethics Inside Economics by Jonathan Aldred

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airport security, Berlin Wall, carbon footprint, citizen journalism, clean water, cognitive dissonance, congestion charging, correlation does not imply causation, Diane Coyle, endogenous growth, experimental subject, Fall of the Berlin Wall, first-past-the-post, framing effect, greed is good, happiness index / gross national happiness, Intergovernmental Panel on Climate Change (IPCC), invisible hand, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, labour market flexibility, laissez-faire capitalism, libertarian paternalism, new economy, Pareto efficiency, pension reform, positional goods, Ralph Waldo Emerson, RAND corporation, risk tolerance, school choice, spectrum auction, Thomas Bayes, trade liberalization, ultimatum game

Notes Chapter 1 1 ‘Perhaps’ because (i) the total sales of some economics classics may be greater, simply because they have been around for so long; and (ii) Freakonomics may not count as an economics book. 2 I borrow this apt term from Paul Krugman, an influential American economist. 3 Coyle (2002), p226. 4 See especially Kasser (2002), James (2007). 5 Technical note. In the language of economics, I have argued that Pareto improvements are not necessarily good things because inequality may increase. A standard objection to this argument is that, when relative position matters, then absolute gains for all do not imply everyone is better off, if inequality has increased. So there is no Pareto improvement after all. My reply to this objection: this refinement of Pareto efficiency is rarely taught or mentioned in textbooks, and hardly ever discussed by applied economists. They talk of absolute gains for everyone as bringing about Pareto improvements, and Pareto improvements are almost universally regarded as unambiguously good. There is an understandable reason for this omission: everyone gaining in absolute terms is rare enough, without demanding that inequality does not rise too.

There is an understandable reason for this omission: everyone gaining in absolute terms is rare enough, without demanding that inequality does not rise too. Interpreting Pareto improvements as incorporating this extra condition would render them almost extinct — and much harder to measure. So in practice, the solution is not to refine the meaning of Pareto improvement, but to abandon the idea that it always represents a change to be welcomed. 6 Smith (1976 [1759]), p183. 7 Keynes (1931), p371. 8 On current trends, income per head in 2030 looks set to be right in the middle of the range predicted by Keynes in 1930. See Samuel Brittain, Financial Times, 3 January 2002. 9 See for example the UK Government’s 2003 White Paper, The Future of Air Transport (available at www.dft.gov.uk/about/strategy/whitepapers/air/); MacLean and Jennings (2006). 10 Nobel Prize-winning economist, Milton Friedman, in Friedman (1953), p5.


pages: 346 words: 90,371

Rethinking the Economics of Land and Housing by Josh Ryan-Collins, Toby Lloyd, Laurie Macfarlane, John Muellbauer

agricultural Revolution, asset-backed security, balance sheet recession, bank run, banking crisis, barriers to entry, basic income, Bretton Woods, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, debt deflation, deindustrialization, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, garden city movement, George Akerlof, ghettoisation, Gini coefficient, Hernando de Soto, housing crisis, Hyman Minsky, income inequality, information asymmetry, knowledge worker, labour market flexibility, labour mobility, land reform, land tenure, land value tax, Landlord’s Game, low skilled workers, market bubble, market clearing, Martin Wolf, means of production, money market fund, mortgage debt, negative equity, Network effects, new economy, New Urbanism, Northern Rock, offshore financial centre, Pareto efficiency, place-making, price stability, profit maximization, quantitative easing, rent control, rent-seeking, Richard Florida, Right to Buy, rising living standards, risk tolerance, Second Machine Age, secular stagnation, shareholder value, the built environment, The Great Moderation, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, universal basic income, urban planning, urban sprawl, working poor, working-age population

Ultimately, these dynamics may be a key explanation of the ‘secular stagnation’ and ‘productivity puzzle’ that has cast a shadow over advanced economies in the last few decades. In the next and final chapter, we propose some solutions that could help reverse the damaging role land has come to play in modern economies. 1 In economics, Pareto efficiency, or Pareto optimality, is a state of allocation of resources in which it is impossible to make any one individual better off without making at least one individual worse off. Pareto efficiency is the state where resources are allocated in the most efficient manner. 2 For further discussion on the flaws of marginal productivity theory see Keen (2011) and Stiglitz (2012). 3 These studies may underestimate the increase in net wealth, particularly at the higher end of the distribution, as they do not consider the effect of equity withdrawal. 4 According to the ONS Wealth and Assets Survey, the Gini coefficient of net property wealth increased from 0.62 to 0.66 between 2006–8 and 2012–14. 5 The National Equality Panel found that the median wages of those who own their property (whether bought outright or with a loan or mortgage) are significantly higher than the earnings of people who rent (whether privately or in social housing).

The rationale for this is that if wages were below productivity, firms would find it profitable to hire more workers. This would put upward pressure on wages. Conversely, if wages were above productivity, firms would find it profitable to shed labour, putting downward pressure on wages. In a competitive market an equilibrium is reached whereby wages equal what each worker can produce, resulting in a Pareto efficient outcome.1 Under this framework differences in individuals’ incomes are therefore said to be related to differences in productivity, skills and effort. Highly paid workers deserve the high wages they receive compared to the less highly paid because they are more productive than members of the latter. Changes in the distribution of income are attributed to changes in technology and to investments in human and physical capital, which have the effect of increasing the skills and productivity of certain individuals.

Act (1919) (the Addison Act), 78 housing quality, 97 housing supply, effect of residual valuation methodology, 98 housing tenure: European regulations, 32; housing costs by tenure, 179; leasehold-freehold, 213; reform proposals, 212–15; restricted sale tenures, 213–14; reversionary tenures, 214; trends, 82, 83, 106–7, 107; see also private rented sector housing wealth: age distribution, 181–2, 181; consumption-to-income ratio trends, 143–4, 144; increase, 158–9, 170; and increase in wealth-to-income ratio, 172–3; net property wealth distribution, 174–5, 174, 175, 176; and wealth inequality, 174–9 Howard, Sir Ebenezer, 75–6 human rights, 23 imputed rental income: Switzerland, 157; UK tax-exemption, 85, 104–5 income: consumption-to-income ratio trends, 143–4, 144; disposable income to house price ratio, 112–14, 114; effects of increased income, 9, 64 income inequality, 162–3 income tax, 69, 168–9 Industrial Revolution, 68–9 inequality: causes and consequences, 165–9; and excessive economic rent, 43; and financial instability, 185–7; Gini coefficient measures, 163, 177, 178; health and social problems, 185; and homeownership, 92; and house prices, 177–8; and housing costs, 179–80; income inequality, 162–3; and inheritance, 182; and land value, 46, 173, 190; and landownership, 26–7; and mortgage debt, 116; property and the state, 17–18; regional inequality, 165, 182–3; and taxation, 168–9; wealth inequality, 163–4, 174–9 infrastructure projects: compulsory land purchase, 31, 73, 196–7, 222; and land value, 6, 42, 194–5 inheritance, 19, 127, 182 inheritance tax (IHT), 104–5, 169, 202 Institute of New Economic Thinking, 218n11 iron and steel industry, 69 James II, King, 66, 80 Japan: credit window guidance, 207; credit-driven bubbles, 111; financial crash, 151–3; house price to income ratio, 112, 114; land prices, 32; mortgage market structure, 157; size of new-builds, 97 Jefferson, Thomas, 22, 26 Jubilee Line, 194–5 Keynes, John Maynard, 84 Keynesianism, 83, 84, 152 King, Mervyn, 154 Korean Land Corporation, 196 labour markets, and homeownership, 27–8 labour productivity, 165–7 land: changing economic role, 190; as collateral, 7, 20–1, 55, 127–8, 160; conflated with capital, 48–52; definition, 38; differences between land and capital, 52–7; and economic rent, 39–44, 56–7; factor of production, 37–8; financialisation, 14, 110–12; historical uses, 3–4; immobile and fixed nature, 55; limited supply, 4, 63; permanent and timeless space, 52–4; state acquisition, 30–1 Land Bank of Britain proposal, 196 land development taxes, 35 land pooling, 197–8 land prices: agricultural, 122–3; effect of financial crisis, 101; land banks (current and strategic), 96–7, 101; and planning regulations, 32; volatility, 8, 8; see also land value Land Registry, 63 land rights, US native population, 26 land taxes: and economic rent, 34–5, 45–8, 76–7, 199, 222; opposition, 57–8, 60, 77; political barriers, 35; theoretical advantages, 34–5; see also land value tax (LVT) land title, 21, 31, 36 land value: asset for the future, 6–7; determined by current use, 6; effect on capital of rising costs, 56; factors outside owner’s control, 55–6; increase over time, 53–4; and inequality, 46, 173, 190; lack of reliable public dataset, 63–4, 219; location and infrastructure, 6; residual valuation methodology, 98–9; site value vs market value, 202; state interventions, 30; uplift created by planning permission, 79–80, 216; use value vs market value, 110; see also land prices land value tax (LVT): Australia, 204–5; Denmark, 204; economic case for reform, 199–201; Henry George’s single tax movement, 46–8, 57–8; Mirlees Review recommendation, 199–200; People’s Budget proposal (1909), 48n9, 76–7; practical and political challenges, 201–5; split rate taxation, 204–5 land-credit feedback cycle, 8, 114–19, 190–1, 222 landlords: taxation, 85; see also buy-to-let (BTL); private rented sector ‘The Landlord’s Game’, 47 landownership: benefits of public ownership, 193–6; and economic rent, 10–13; ‘high income-elasticity of demand’, 9; and inequality, 26–7; land pooling, 197–8; modern economic theories, 16–18; moral qualities, 22; multiple forms, 18–20; and political power, 22–3; and social status, 20; as theft, 22–5, 43, 189; see also property ownership Lassalle, Ferdinand, 43 leasehold-freehold tenure, 213 leases, lifetime leases, 74 legacy landowners, 197–8 Lenin, Vladimir, 43 Letchworth Garden City, 75 Letchworth Heritage Foundation, 75 leverage, 184 liberal economics see classical economics lifecycle model, 124–8, 159 living conditions, 70–1 Lloyd George, David, 48, 76, 78 Lloyds TSB, 139 loan-to-value (LTV) ratios, 139, 156, 157 location, 6, 40–3 Locke, John, 16–18, 26 London: Bishops’ Avenue, 109; Boundary Estate, 73; Jubilee Line, 194–5; Old Nichol, 73; private rented sector, 223; St Clements Community Land Trust, 214 mainstream economics see neoclassical economics Malthus, Thomas, 40 manufacturing industry, 168 marginal productivity theory, 49–50, 51, 56, 57–9, 165–7 Marshall, Alfred, 55 Marx, Karl, 18, 43, 59, 61 mercantilism, 38, 70 microeconomics, 34, 51, 53 Mill, John Stuart, 25, 45, 199 Milton Keynes, 88 Minsky, Hyman, 152–3, 155 MIRAS (mortgage interest relief at source), 86 Mirrlees Review, 199–200 monetarism, 86, 87 Monopoly, 47 mortgage lending: affordability pressures, 100; bad debt, 140; bank funding arrangements, 131; as credit creation, 114; debt-to-income ratio, 115–16, 116, 139, 159, 186; default rates, 141; deregulation, 88, 132–5, 178; financial crisis collapse, 139–40; full recourse vs non-recourse loans, 141–2; house price-credit feedback cycle, 119–24; importance in banks’ lending portfolios, 61, 119; interest rates for landlords, 77; lifecycle model, 124–8, 159; loan-to-income limits, 155; loan-to-value (LTV) ratios, 139, 156, 157; mortgage debt-to-GDP ratio, 156–8, 156; mortgage interest relief at source (MIRAS), 86; reform proposals, 211–12; residential mortgage-backed securities (RMBS), 137–9, 140, 160; tax relief, 133; trends, 107; see also buy-to-let (BTL) Muellbauer, John, 110 mutual co-ownership, 86 Napoleonic Wars, 69 national accounts, lack of land value information, 63–4, 219 national income: wealth to national income ratio, 171–4, 171, 172; see also GDP nationalisation, 43 natural law, 25–6 natural property rights theory, 16–18 negative equity, 123, 133–4 neoclassical economics, 5, 17, 27, 48–9, 50, 52, 57, 111, 192 Netherlands, land pooling, 198 New Keynesianism, 125n6 New Towns programme, 66, 71, 80–1, 88, 184, 197 new-build homes, 97 NIMBYism, 24 Northern Rock, 136–7 Nozick, Robert, 26 OECD, 64, 219, 220 Office for National Statistics, Blue Book, 219 oil sector, 44 OPEC (Organization of the Petroleum Exporting Countries), 44 orthodox economics see neoclassical economics Oswald, Andrew J., 27 overseas investment, 100, 122, 149, 160, 183 Owen, Robert, 71 Paine, Thomas, 25 Pareto efficiency, 166n1 patents, 44 Peabody, George, 71 Peel, Robert, 43 Pennsylvania, split rate taxation, 205 Phillips, Elizabeth J. Magie, 47 Physiocrats, 38 Pickett, Kate, 185 Piketty, Thomas, 9, 27; Capital in the Twenty-first Century, 170–3 planning applications: basements, 57n16; local resistance, 27, 97 planning permission: conditionalities, 33, 93–6, 216; and uplift in land value, 79–80, 216 planning regulations: and house prices, 113; and land price, 32; and land supply restrictions, 12; reform proposals, 215–17, 221 ‘plotlands’ movement, 72 Poland, serfdom, 23–4 Ponzi financing, 152, 153 population growth, 68 Primitive Accumulation concept, 18 private rented sector, 103–6, 107, 134, 179, 215, 223 production factors, 37–8 productivity: and homeownership, 27, 28; and incomes, 165–7; see also marginal productivity theory property ownership: freedom and theft, 25–6, 43, 189; non-bank investment, 112; and social status, 9; see also landownership property rights, and the state, 16, 17–18 property taxes, salience, 201, 203 property wealth see housing wealth Proudhon, Pierre-Joseph, 26, 43, 61 public health: land regulations, 32; slum areas, 70–1 Public Health Acts, 73 public sector debt, 219–21 Pufendorf, Samuel, 16 quantitative easing, 149 regional inequality, 165, 182–3 rent: imputed rental income tax exemption, 85–6, 104–5; percentage paid, 74 rent controls, 77 rent trap, 106 rent-seeking, 12–13 rented housing: Assured Shorthold Tenancy, 89; housing costs, 179; nineteenth century, 74; rent extraction, 46n6; social renting, 78, 107; see also affordable housing; buy-to-let (BTL); housing tenure; private rented sector; social housing rentier economy, 107 rentiers, 39 residential mortgage-backed securities (RMBS), 137–9, 140, 160 residential property wealth, 9, 10 retirement, and housing equity, 103 return on capital investment, 56 Ricardo, David, 12, 25, 39–40, 49, 60–1, 199 Right to Buy policy, 89, 90–1, 103 Rousseau, Jean-Jacques, 15 Rowntree, Joseph, 71 Royal Commission on the Housing of the Working Classes (1885), 74 Russian oligarchs, 184 St Clements Community Land Trust, 214 Salt, Titus, 71 Santander, 139 Second World War, 79, 207 Section 106 planning conditionalities, 93–6, 216 securitisation, 135–42, 156–7, 156 self-builders, 82; ‘plotlands’ movement, 72 serfdom, 23–4 services sector, 168 sewers, 73 Singapore, state ownership of land, 194 ‘Single-taxers’ movement, 47 slums, 70–1, 73 small and medium sized enterprises (SMEs), 148, 208–9 Smith, Adam, 17–18, 37, 40, 45, 161, 199 social care, and housing equity, 103 social democratic regimes, 59, 61 social housing: Boundary Estate, 73–4; early philanthropic efforts, 71–2; interwar rise, 78–9; provided by local councils, 30; residualisation, 90; reversionary tenures, 214; trends, 83, 107, 179; see also affordable housing social problems, and inequality, 185 social status, 20 socialism, 59–62 South Korea: credit window guidance, 207; Korean Land Corporation, 196 South-East Asia, credit-driven bubbles, 111 Spain, mortgage market structure, 157 spatial inequality, 165, 182–3 squatting, 72 stamp duty land tax (SDLT), 104 state: benefits of public landownership, 193–6; land acquisition, 30–1; and landownership, 22–3; policy interventions, 29–30, 192–3; and property rights, 16, 17–18 Stiglitz, Joseph, 12–13, 110, 161 subsidies, 33–4, 89, 91, 213–14 suburbanisation, 78–9 superstar effect, 167–8 Switzerland: economic success and low homeownership, 215; mortgage market structure and homeownership, 157–8, 157 Taiwan, credit window guidance, 207 tax relief: buy-to-let mortgages, 62, 160; second homes, 160 taxation: agricultural land, 69; council tax, 104, 201, 202; domestic commodities, 69; imputed rental income, 85, 104–5, 157; and inequality, 168–9; land development taxes, 35; property tax salience, 201, 203; property transactions, 35, 200–1; reform proposals, 199–205; residential property taxes, 104–5; Swiss imputed rent tax, 157; see also capital gains tax; land value tax (LVT) technological change, 168, 169 tenant co-partnership, 72 tenure see housing tenure textile industry, 69 Thatcher government, 88–91, 132 Thatcher, Margaret, 86, 155 time, 53 Town and Country Planning Act (1932), 80 Town and Country Planning Act (1990), 93–6 town planning, 71 trade unions, 169 Turner, Adair, 110, 120–2 unemployment, 27, 215 United States: anti-trust legislation, 60; house price to income ratio, 113, 114; mortgage market structure, 157; National Parks Service, 30; native population and land rights, 26; non-recourse mortgage loans, 141–2; Pennsylvania split rate taxation, 205; public investment, 60; residential property wealth, 9, 10; slavery, 24 urban regeneration, 88 urbanisation, 41, 68–9, 70 US Federal Reserve, credit controls, 207 Valuation Office Agency, 63, 202 Veblen, Thorsten, 9 wages: declining share in national income, 169; economic theories, 39–40; and labour productivity, 165–7; ratio to house prices, 99, 100 war, and property redistribution, 27 waste collection, 73 wealth: differing forms, 143; UK distribution of net worth, 164; wealth to national income ratio, 171–4, 171, 172; see also housing wealth wealth inequality, 163–4, 174–9 Welwyn Garden City, 75 Wheatley Housing Act (1924), 78 wholesale money markets, 131, 139 Wicksteed, Philip, 50 Wilkinson, Richard, 185 World War I, 77 World War II, 79, 207


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Radical Technologies: The Design of Everyday Life by Adam Greenfield

3D printing, Airbnb, augmented reality, autonomous vehicles, bank run, barriers to entry, basic income, bitcoin, blockchain, business intelligence, business process, call centre, cellular automata, centralized clearinghouse, centre right, Chuck Templeton: OpenTable, cloud computing, collective bargaining, combinatorial explosion, Computer Numeric Control, computer vision, Conway's Game of Life, cryptocurrency, David Graeber, dematerialisation, digital map, distributed ledger, drone strike, Elon Musk, ethereum blockchain, facts on the ground, fiat currency, global supply chain, global village, Google Glasses, IBM and the Holocaust, industrial robot, informal economy, information retrieval, Internet of things, James Watt: steam engine, Jane Jacobs, Jeff Bezos, job automation, John Conway, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, John von Neumann, joint-stock company, Kevin Kelly, Kickstarter, late capitalism, license plate recognition, lifelogging, M-Pesa, Mark Zuckerberg, means of production, megacity, megastructure, minimum viable product, money: store of value / unit of account / medium of exchange, natural language processing, Network effects, New Urbanism, Occupy movement, Oculus Rift, Pareto efficiency, pattern recognition, Pearl River Delta, performance metric, Peter Eisenman, Peter Thiel, planetary scale, Ponzi scheme, post scarcity, RAND corporation, recommendation engine, RFID, rolodex, Satoshi Nakamoto, self-driving car, sentiment analysis, shareholder value, sharing economy, Silicon Valley, smart cities, smart contracts, sorting algorithm, special economic zone, speech recognition, stakhanovite, statistical model, stem cell, technoutopianism, Tesla Model S, the built environment, The Death and Life of Great American Cities, The Future of Employment, transaction costs, Uber for X, universal basic income, urban planning, urban sprawl, Whole Earth Review, WikiLeaks, women in the workforce

An increased police presence on the streets of a district reassures some residents, but makes others uneasy, and puts yet others at definable risk. Even something as seemingly straightforward and honorable as an anticorruption initiative can undo a fabric of relations that offered the otherwise voiceless at least some access to local power. We should know by now that there are and can be no Pareto-optimal solutions for any system as complex as a city.39 That such a solution, if it even existed, could be arrived at algorithmically is also subject to the starkest doubt. Assume, for the sake of argument, that there did exist a master formula capable of resolving all resource allocation conflicts and balancing the needs of all of a city’s competing constituencies. It certainly would be convenient if this golden mean could be determined automatically and consistently, via the application of a set procedure—in a word, algorithmically.

idxno=2013071614443771298. 37.Jim Fletcher, IBM Distinguished Engineer, and Guruduth Banavar, Vice President and Chief Technology Officer for Global Public Sector, personal communication, June 8, 2011. 38.Michal Migurski, “Visualizing Urban Data,” in Toby Segaran and Jeff Hammerbacher, Beautiful Data: The Stories Behind Elegant Data Solutions, Sebastopol CA: O’Reilly Media, 2012. See also Michal Migurski, “Oakland Crime Maps X,” tecznotes, March 3, 2008, mike.teczno.com. 39.See, as well, Sen’s dissection of the inherent conflict between even mildly liberal values and Pareto optimality. Amartya Kumar Sen, “The impossibility of a Paretian liberal,” Journal of Political Economy Volume 78 Number 1, Jan–Feb 1970. 40.Jay Forrester, Urban Dynamics, Cambridge, MA: The MIT Press, 1969; Joe Flood, The Fires: How a Computer Formula Burned Down New York City—And Determined the Future Of American Cities, New York: Riverhead Books, 2010. 41.See, e.g., Luís M.A. Bettencourt et al., “Growth, Innovation, Scaling, and the Pace of Life in Cities,” Proceedings of the National Academy of Sciences, Volume 104, Number 17, April 24, 2007, pp. 7301–6. 42.Flood, ibid. 43.See Amazon’s interview with Fires author Joe Flood: amazon.com/Fires-Computer-Intentions-City---Determined/dp/1594485062/ref=sr_1_1?

., 269 Machii, Isao, 266–7 machine learning, 8, 16, 60, 185, 192, 194, 209–57, 308 maker spaces, 93 MakerBot, 85, 88, 101, 104–5, 107 mapping, 22–5, 275, 278 Mann, Steve, 77–8 Marx, Karl, 70, 305 MasterCard, 120 Mason, Paul, 88 Mauthausen, 61 McDonald’s restaurant chain, 194–5 McDonough, William, 96 McNamara, Robert, 57 Merkle roots, 123 Metropolitan Police Service, London, 231 Microsoft, 38–9, 262, 275 minimal techno (music genre), 221 Minority Report (movie), 227, 230 MIT Technology Review (journal), 243 Mitte, Berlin neighborhood, 71–2 Monobloc chair, 106 Monroe, Rodney, 230 Moore’s Law, 88, 93 Morris, David, 256–7 Mountain View, California, 284 M–Pesa digital currency, 117 Music Genome Project, 220 Musk, Elon, 222 National Institute of Justice, 233 National Public Radio, 41, 192 National September 11th Memorial, 65 National Technical University of Athens, 173 NAVSTAR Global Positioning System, 21 NBC Universal, 220 neural networks, 214–16, 219, 264, 266 Nevada, 192 New York City, 51, 56–8, 136, 238 New York Times (newspaper), 177 Next Rembrandt project, 262–3, 265 near-field communication standard (NFC), 17, 117 Niantic Labs, 65 Niemeyer, Oscar, 261 Nieuwenhuys, Constant, 190 Niigata, Japan, 301–2 niqab, 295 Nixon Administration, 204 nonvolatile memory, 15 North Dakota, 192 Norwegian black metal (music genre), 221 Nuit Debout protests, 3 Occupy movement, 167, 169 Oculus Rift virtual reality headset, 82 O’Neil, Cathy, 249 open source hardware, 102 OpenTable, 39–40, 46 Osborne, Michael A., 195 Ostrom, Elinor, 171 output neuron, 215 overtransparency, 240–1, 243 Pai, Sidhant, 98 Pandora music service, 220 Panmunjom Truce Village, 65 Pareto optimality, 55, 59 Paris, 1–6, 292 Pasquale, Frank, 244, 253 path dependence, 232, 299 PayPal, 120, 136, 220 PCWorld, 45 People Analytics, 198, 226, 232 perceptron, 214 Père Lachaise cemetery, 2, 5, 26 persoonskaart, Dutch identity card, 60 Pew Research Center, 41, 193 Pinellas County, Florida, 256 Placemeter, 51 polylactic acid plastic filament (PLA), 94, 98, 101 Pokémon Go, 63–5, 76, 79 Polari, 311 policy network, 264 Pollock, Jackson, 261 Pony Express, 256 porosity, 28, 173 POSIWID, 155, 302 Postcapitalism (Paul Mason), 88 power/knowledge, 62 predictive policing, 227, 230, 232, 235 PredPol, 229, 231, 236, 244, 254 proof-of-work, 128–30, 140–1, 143, 290 prosopagnosia.


pages: 385 words: 111,807

A Pelican Introduction Economics: A User's Guide by Ha-Joon Chang

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Affordable Care Act / Obamacare, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Berlin Wall, bilateral investment treaty, borderless world, Bretton Woods, British Empire, call centre, capital controls, central bank independence, collateralized debt obligation, colonial rule, Corn Laws, corporate governance, corporate raider, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, discovery of the americas, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Francis Fukuyama: the end of history, Frederick Winslow Taylor, full employment, George Akerlof, Gini coefficient, global value chain, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, Gunnar Myrdal, Haber-Bosch Process, happiness index / gross national happiness, high net worth, income inequality, income per capita, information asymmetry, intangible asset, interchangeable parts, interest rate swap, inventory management, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, knowledge economy, laissez-faire capitalism, land reform, liberation theology, manufacturing employment, Mark Zuckerberg, market clearing, market fundamentalism, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, Northern Rock, obamacare, offshore financial centre, oil shock, open borders, Pareto efficiency, Paul Samuelson, post-industrial society, precariat, principal–agent problem, profit maximization, profit motive, purchasing power parity, quantitative easing, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, Scramble for Africa, shareholder value, Silicon Valley, Simon Kuznets, sovereign wealth fund, spinning jenny, structural adjustment programs, The Great Moderation, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade liberalization, transaction costs, transfer pricing, trickle-down economics, Vilfredo Pareto, Washington Consensus, working-age population, World Values Survey

The elevation of the individual by the Neoclassical school goes beyond the labelling of economic actors as individuals, rather than classes. Most members of the school believe in methodological individualism as well – namely, the view that a scientific explanation of any collective entity, such as the economy, should be based on its decomposition to the smallest possible unit – that is, the individual. 6. Another way to put it is to say that a society is in a state of Pareto optimality if no one can be made better off without making someone worse off. 7. In Akerlof’s classic example of ‘the market for lemons’, given the difficulty of ascertaining the quality of used cars before purchase, prospective buyers will not be willing to stump up good money even for what is a truly good second-hand car. Given this, owners of good used cars will shun the market, lowering the average quality of cars further, leading, in the extreme case, to the disappearance of the market itself.

 * Despite the fact that it was going to hurt US workers in industries like automobile and textiles, many Neoclassical economists advocated the NAFTA, the free-trade agreement with Mexico and Canada, on the ground that the national gains from increased trade are more than enough to compensate those (and other) losers. Unfortunately, the losers have not been fully compensated, so the outcome could not be called a Pareto improvement. * Before the Russian Revolution, the leading Marxist economists were Karl Kautsky (1854–1938), Rosa Luxemburg (1871–1919) and Rudolf Hilferding (1877–1941). The key Soviet Marxist theorists were Vladimir Lenin (1870–1924), Yevgeni Preobrazhensky (1886–1937) and Nikolai Bukharin (1888–1938). * In some formulations, communism is divided into two phases. The first phase is also called socialism and is run through central planning.


pages: 330 words: 77,729

Big Three in Economics: Adam Smith, Karl Marx, and John Maynard Keynes by Mark Skousen

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Albert Einstein, banking crisis, Berlin Wall, Bretton Woods, business climate, creative destruction, David Ricardo: comparative advantage, delayed gratification, experimental economics, financial independence, Financial Instability Hypothesis, full employment, Hernando de Soto, housing crisis, Hyman Minsky, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Arrow, laissez-faire capitalism, liberation theology, liquidity trap, means of production, microcredit, minimum wage unemployment, money market fund, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, price stability, pushing on a string, rent control, Richard Thaler, rising living standards, road to serfdom, Robert Shiller, Robert Shiller, rolodex, Ronald Coase, Ronald Reagan, school choice, secular stagnation, Simon Kuznets, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, Tobin tax, unorthodox policies, Vilfredo Pareto, zero-sum game

Both Walras and Pareto, after years of laying the foundation of welfare economics, found themselves moving away from the Smithian vision. For example, the problem with Pareto optimality is that it ignores the omnipresent trade-offs in economic life. Seldom is one policy un-dertaken that improves some people's lives without injuring others in the short run. Opening trade, eliminating subsidies, and deregulating industries could help some groups and hurt others. Eliminating tariffs between the United States and Mexico will create many new jobs, but it will also destroy many traditional jobs. This is an inevitable feature of the mixed economy. The net effect is undoubtedly beneficial, but the transition might not fit Pareto optimality. Americans Solve the Distribution Problem in Economics The European schools of economics—followers of Menger, Marshall, and Walras, among others—had made a major breakthrough with the discovery of the subjective marginality principle.

In a broader perspective, Arrow and Hahn declare that Smith's vision "is surely the most important intellectual contribution that economic thought has made to the general understanding of social processes" (Arrow and Hahn 1971, v, vii, l).Not only does welfare economics (Walras's law, 8. In welfare economics, "welfare" refers to the general well-being or common good of the people, not to people on welfare or government assistance. Pareto's optimality, Edgeworth's box) confirm mathematically and graphically the validity of Adam Smith's principal thesis, but it shows how, in most cases, government-induced monopolies, subsidies, and other forms of noncompetitive behavior lead inevitably to inefficiency and waste (Ingrao and Israel 1990). Smith's References to the Invisible Hand Surprisingly, Adam Smith uses the expression "invisible hand" only three times in his writings.

In Elements of Pure Economics (195 A [1874,1877]), Walras extended his analysis to multiparty, multicommodity exchanges under the assumptions of free competition, perfect mobility of factors of production, and price flexibility. By simulating a market auctioneering process, Walras showed that prices change according to supply and demand, and grope toward equilibrium. Thus, he was able to demonstrate that, without central authority, a trial-and-error market system could still achieve maximum social satisfaction or general equilibrium (GE). Pareto is best known for the concept of Pareto optimality. Like Walras, he attempted to show that a perfectly competitive economy achieves an optimal level of economic justice, where the allocation of resources cannot be changed to make anyone better off without hurting someone else. Edgeworth, like Marshall, was atoolmaker, and developed indifference curves, utility functions, and fundamentals of the Edgeworth box, a way of expressing various trading relationships between two individuals or countries.


pages: 165 words: 45,129

The Economics of Inequality by Thomas Piketty, Arthur Goldhammer

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affirmative action, basic income, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, conceptual framework, deindustrialization, endogenous growth, Gini coefficient, income inequality, low skilled workers, means of production, moral hazard, Pareto efficiency, purchasing power parity, Simon Kuznets, The Bell Curve by Richard Herrnstein and Charles Murray, very high income, working-age population

Should the market and its price system be allowed to operate freely, with redistribution effected solely by means of taxes and transfers, or should one attempt to alter the structure of the market forces that generate inequality? In the jargon of economics, this contrast corresponds to the distinction between pure redistribution and efficient redistribution. Pure redistribution occurs when the market equilibrium is “Pareto efficient,” meaning that it is impossible to alter the allocation of resources and output in such a way that everyone gains, yet social justice nevertheless calls for redistribution from the better-off to the worse-off. Efficient redistribution occurs when the existence of market imperfections allows for direct intervention in the production process to achieve Pareto-efficient improvements in the allocation and equitable distribution of resources. In contemporary political conflict, the distinction between pure and efficient redistribution is often conflated with the distinction between redistribution on a modest scale and redistribution on a large scale.

See also Income, share of capital in Capitalism: capital-labor substitution, 39; Cobb-Douglas production function, 48; critics of and credit rationing, 61–62, 64; increases in inequality and, 17–18, 98 Capital-labor inequality, 26–27; capital-labor substitution, 27–40; classic and marginalist theories, 40–55; dynamics of distribution of capital, 55–65 Capital-labor substitution, 27–30; elasticity of, 32–35, 37–39, 48–49, 51–54, 75–76; elasticity of capital supply, 35–37, 39; fiscal and direct redistribution, 30–32; market economy and price system, 37–40 Card, David, 95–96 Classical and marginalist theories, of capital-labor split, 29–30, 39–40, 41t; Cobb-Douglas production function and, 48–49; economic value added and, 42–43; household income distribution, 41, 44–45; political and historical time and, 41t, 49–53, 50t; profit share constancy and, 41t, 45–46; profit share in United Kingdom and United States, 41t, 53–55; share of social charges, 46–48 Clinton, Bill, 96 Cobb-Douglas production function, 33–34, 48–49 Coleman, James, and report by, 82, 83–84 Collectivization, of means of production, 39, 62, 63–64 Competition: credit markets and, 57, 61; social insurance and, 115; taxes and, 37, 65 Compulsory education, human capital and, 80–81 Conditional convergence, 59 Convergence, between rich and poor countries, 57–60 C ratios, labor inequality and, 76–77 Credit markets: convergence between rich and poor countries, 57–60; imperfection of, 58–65, 69, 80–81, 114; perfect credit market theory and, 56–57, 78 Credit rationing, 61–62, 64 Deferred income, social insurance and, 116 Demand management, redistribution and, 114, 119–121 Denmark: social protection, 47–48; wage inequality, 10 Development banks, as possible intervention in credit market, 62–63 Direct redistribution: agriculture and, 63–64; elasticity of substitution between capital and labor, 30–35, 48–49; fiscal redistribution and, 28, 31, 98; inequality of labor income and, 75–76; unions and, 90–91 Disadvantaged communities, human capital and, 82–83 Discrimination, in labor market, 85–88, 113–114, 121 Distribution of capital, dynamics of, 55–56; capital market imperfections, 60–65; perfect credit and convergence, 56–60 D ratios: sources of household income, 6t; wage inequality, 8–10, 9t Earned Income Tax Credit (EITC), in US, 108–109, 112 Economic efficiency: distribution of capital, 55, 57, 61, 65; human capital, 86; unions and, 92–94 Economic value added: capital income and labor income, 41t, 42; capital share of (1979–1995), 50t; complications of calculating, 43 Education: human capital and, 67, 69–70, 79–84, 92–93; redistribution and, 59–60, 117; wage inequality and, 72–73, 99 Efficiency wages, 97–99 Efficient redistribution, 35, 62–63, 67, 113–114; demand management and, 119–121; egalitarian education policy and, 59, 80; minimum wage and, 94–95; Pareto efficiency and, 2–3, 79; social insurance, 114–119. See also Human capital entries Elasticity of substitution between capital and labor, 32–35, 37–39, 48–49, 51–54, 75–76 Elasticity of supply of capital, 35–37, 39 Elasticity of supply of human capital, 78–79, 82–83, 87, 107 Employment: inequality with respect to, 23–25; job creation and elasticity of substitution between capital and labor, 51, 53–55.

See Price system Marx, Karl, 26, 30, 39; proletarianization thesis of, 17–18 Maximin principle, of Rawls, 2, 35, 106 McGovern, George, 112 Means of production, collectivizing of, 39, 62, 63–64 Minimum wage: EITC and, 109; health insurance and, 103; monopsony power of employers, 96; raising of, and effect on level of employment, 95–96; redistribution and, 75, 94; unions and, 91; in US and France, 50, 110–111, 117; wage distribution and, 8 Monopoly power, of unions, 89, 94 Monopsony power, of employers, 94–96, 113–114, 121 Moral hazard, credit markets and, 60–61 Murray, Charles, 82, 87 Negative income tax, 1, 3, 112–113 Nonwage compensation, 6t, 8, 12, 13. See also Self-employment compensation Norway: historical evolution of inequality, 22; income inequality, 14; wage inequality, 10 OECD countries: evolution of shares of profits and wages, 49–53, 50t; historical evolution of inequality, 21; income inequality, 14–15, 15t; wage inequality, 10–11, 11t Panel Study of Income Dynamics (PSID), 83 Pareto efficiency, 2–3, 57, 79 Part-time work, income inequality and, 25 Pay-as-you-go (PAYGO) pension systems, 117–118 Payroll taxes. See Social charges Pension plans: private, 118; public, 115–119 Phelps, Edmund, 85 Poverty traps, human capital and, 108, 110, 113 P ratios: income inequality, 12–14, 12t, 15t, 16–17, 23–25, 76–77; inequality’s historical evolution, 20–23, 21t; minimum wage, 91; P defined, 7; sources of household income and, 6t; wage inequality, 8–11, 77 Price system: allocative role of, 30–33, 37–40, 100; elasticity of substitution and, 32–40; housing and educational outcomes, 84; role in capital-labor share of total income, 27–30, 32; social justice and, 106 Primary distribution, 28 Prison population, underemployment and, 24 Private sector jobs, unemployment and fiscal redistribution, 111–112 Profit share: constancy of, 41t, 45–46; historical and political time and, 49–53; in US and UK, 53–55 Progressive estate tax, 19, 64 Progressive income tax, 19, 48, 64, 102–103, 106 Public investment banks, as possible intervention in credit market, 62–63 Public-sector jobs: pensions and, 115–119; unemployment and fiscal redistribution, 111–112; wages, 10 Purchasing power, of workers: changes in twentieth century, 45, 50–51, 68–69, 91, 96, 111; inequality in time and space, 16–17, 16t; redistribution of, 120–121 Pure redistribution, 32, 55, 67; absence of redistribution between workers, 102–104; average and marginal rates of redistribution, 100–102, 102f; Earned Income Tax Credit, in US, 108–109; fiscal redistribution to reduce unemployment and, 109–112; fundamental purposes of, 105–106; high taxes and revenue, 106–108; negative income tax and basic income, 112–113; Pareto efficiency and, 2–3; U-shaped curve of marginal rates, 104–105, 109 Rawls, John, 2, 35, 106 Redistributive policy, left-right conflict about, 1–3.


pages: 580 words: 168,476

The Price of Inequality: How Today's Divided Society Endangers Our Future by Joseph E. Stiglitz

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affirmative action, Affordable Care Act / Obamacare, airline deregulation, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collapse of Lehman Brothers, collective bargaining, colonial rule, corporate governance, Credit Default Swap, Daniel Kahneman / Amos Tversky, Dava Sobel, declining real wages, deskilling, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, income inequality, income per capita, indoor plumbing, inflation targeting, information asymmetry, invisible hand, jobless men, John Harrison: Longitude, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, London Interbank Offered Rate, lone genius, low skilled workers, Marc Andreessen, Mark Zuckerberg, market bubble, market fundamentalism, mass incarceration, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, negative equity, obamacare, offshore financial centre, paper trading, Pareto efficiency, patent troll, Paul Samuelson, payday loans, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, technology bubble, The Chicago School, The Fortune at the Bottom of the Pyramid, The Myth of the Rational Market, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, ultimatum game, uranium enrichment, very high income, We are the 99%, wealth creators, women in the workforce, zero-sum game

Quimby, “Comparing Compensation: State-Local versus Private Sector Workers,” Center for Retirement Research at Boston College, no. 20, September 2011. 15. Traditionally many economists have been uncomfortable in dealing with these distributive changes, because of the difficulties of making interpersonal comparisons. Economists often focus on “Pareto efficient” equilibria—where no one can be made better-off without making someone else worse-off; or on “Pareto improvements,” where someone is made better-off, but no one is harmed. But few policy changes are of that sort. Generally, some gain and some lose. A Pareto efficient equilibrium, as is learned in elementary economics courses (and then perhaps forgotten), might be very undesirable because it left many people at bare subsistence. 16. Several hundred years ago, in England and Scotland, the large landowners enclosed the common land.

Some earlier, idealized economic models suggested that it was optimal not to tax interest income (income from capital), but subsequent research showed that this result was not robust: capital taxation is desirable. See, e.g., Thomas Piketty and Emmanuel Saez, “A Theory of Optimal Capital Taxation,” working paper, 2011, Paris School of Economics and University of California at Berkeley, available at http://elsa.berkeley.edu/~saez/piketty-saez1_1_11optKtax.pdf (accessed February 27, 2012); and J. E. Stiglitz, “Pareto Efficient Taxation and Expenditure Policies, with Applications to the Taxation of Capital, Public Investment, and Externalities,” presented at conference in honor of Agnar Sandmo, Bergen, Norway, January 1998. 69. Which allowed those in private equity firms and hedge funds to be taxed on their returns—including what they received from managing other people’s money—at the favorable capital gains tax rate. 70.


pages: 274 words: 93,758

Phishing for Phools: The Economics of Manipulation and Deception by George A. Akerlof, Robert J. Shiller, Stanley B Resor Professor Of Economics Robert J Shiller

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Andrei Shleifer, asset-backed security, Bernie Madoff, Capital in the Twenty-First Century by Thomas Piketty, collapse of Lehman Brothers, corporate raider, Credit Default Swap, Daniel Kahneman / Amos Tversky, dark matter, David Brooks, en.wikipedia.org, endowment effect, equity premium, financial intermediation, financial thriller, fixed income, full employment, George Akerlof, greed is good, income per capita, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, late fees, loss aversion, Menlo Park, mental accounting, Milgram experiment, money market fund, moral hazard, new economy, Pareto efficiency, Paul Samuelson, payday loans, Ponzi scheme, profit motive, publication bias, Ralph Nader, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, Silicon Valley, the new new thing, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, theory of mind, Thorstein Veblen, too big to fail, transaction costs, Unsafe at Any Speed, Upton Sinclair, Vanguard fund, Vilfredo Pareto, wage slave

Most economists therefore feel they can be comfortable with thinking that people’s choices do reflect what they really want, with the further view that the number and consequences of dysfunctional decisions is small. This view is consistent with the observation that at least in developed countries most people purposefully manage to obtain their basic needs. Such purposefulness may lead us to believe that the difference between Pareto optimality in our true welfare and Pareto optimality in our monkey-on-the-shoulder welfare is inconsequential. That difference may arise in our contract at a health club, or in our purchase of ink cartridges. But these are exceptions, and so revealed preference is right: most of the time. But thinking about phishing generally, as we do, has cued us, on the contrary, to see that phishing for phools is not some occasional nuisance.

Back in 1776, the father of the field, Adam Smith, in The Wealth of Nations, wrote that, with free markets, as if “by an invisible hand … [each person] pursuing his own interest” also promotes the general good.16 It took a bit more than a century for Smith’s statement to be precisely understood. According to the modern version, commonly taught even in introductory economics, a competitive free-market equilibrium is “Pareto optimal.”17 That means that once such an economy is in equilibrium, it is impossible to improve the economic welfare of everyone. Any interference will make someone worse off. For graduate students, this conclusion is presented as a mathematical theorem of some elegance—elevating the notion of free-market optimality into a high scientific achievement.18 The theory, of course, recognizes some factors that might blemish such an equilibrium of free markets.

It is worth noting that although he had done many positive things in the Senate (closing inappropriate personal income-tax loopholes, and battling sex slavery, for example) the ad itself conveys nothing about the candidate’s policies, or even about his character. On the contrary, if anything, the ad should leave the voters asking the source of the money to pay for it; but, with a successful ad, the thought does not occur to them. The effects of phishing in politics parallel the effects of phishing in economics. Basic economic theory says that, in the absence of phishing, economic competition generates a good equilibrium (which is “Pareto optimal,” as we discussed in the introduction, on phishing equilibrium); similarly, basic political science says that competitive democratic elections generate good outcomes. This result is usually attributed to political scientist Anthony Downs.10 If voters are fully informed and vote their preferences, which can be represented on a scale from left to right, the platforms of the two opposing candidates will reach an equilibrium.


pages: 484 words: 136,735

Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis by Anatole Kaletsky

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bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Black Swan, bonus culture, Bretton Woods, BRICs, Carmen Reinhart, cognitive dissonance, collapse of Lehman Brothers, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, Edward Glaeser, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, F. W. de Klerk, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, global rebalancing, Hyman Minsky, income inequality, information asymmetry, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, Long Term Capital Management, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, money market fund, moral hazard, mortgage debt, new economy, Northern Rock, offshore financial centre, oil shock, paradox of thrift, Pareto efficiency, Paul Samuelson, peak oil, pets.com, Ponzi scheme, post-industrial society, price stability, profit maximization, profit motive, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, statistical model, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, Vilfredo Pareto, Washington Consensus, zero-sum game

Proposed by the Italian statistician Vilfredo Pareto, who later became an inadvertent hero of the Italian fascist movement, this concept stated merely that no one in society could be made better off without someone else suffering a loss. Pareto Optimality2 deliberately and consciously ignored the critical questions of interpersonal comparisons: Could the world be improved in some sense by taking a crust of bread from Rockefeller and giving it to a starving child? Might it be better for society to offer such a child a free education if this meant imposing a modest tax on Rockefeller’s wealth? Pareto Optimality, which also came to be described as efficiency, avoided all such issues of interpersonal comparisons and distribution. That was the ideological beauty of this concept. It allowed economists to relegate all questions of justice, social solidarity, and so on to what they considered the junior league of unscientific academic disciplines, such as sociology, politics, and moral philosophy.

Rational Expectations, along with the Policy Ineffectiveness Proposition and the concepts of Ricardian Equivalence and the “natural” rate of unemployment, all “proved” that government efforts to manage economic cycles and unemployment were futile and counterproductive. General equilibrium “proved” that a capitalist economy would always achieve full employment if only governments would leave it alone. Pareto Optimality “proved” that a market economy would always allocate resources in the most productive possible manner. Efficient markets “proved” that the only constructive role of government in the economy was to deregulate and privatize. These were exactly the conclusions that politicians and business leaders wanted to hear from economists to validate the Thatcher and Reagan reforms. Better still, the rational, efficient, natural, and mathematically irrefutable outcomes of market forces seemed to legitimize the distribution of income, wealth, and power decreed by whatever happened to be the economic and political status quo.

Or suppose that rational expectations had been renamed internally consistent expectations, as some of its proponents originally suggested. An adequate refutation might then have been Ralph Waldo Emerson’s acerbic comment that “a foolish consistency is the hobgoblin of little minds.” To continue this thought experiment, try replacing perfect competition with ruthless exploitation, general equilibrium with timeless stasis, Pareto Optimality with Entrenched Privilege, Ricardian Equivalence with Barro’s False Assumption, natural rate of unemployment with deliberate job destruction, and so on. Like President Bush’s Clear Skies Act, which freed polluting industries to increase emissions, the Healthy Forests Initiative, which promoted logging, and the Homeland Security Act, which encouraged paranoia, the market fundamentalist economic orthodoxy achieved its dominance partly through a clever choice of adjectives.


pages: 221 words: 55,901

The Globalization of Inequality by François Bourguignon

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Berlin Wall, Branko Milanovic, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, Credit Default Swap, deglobalization, deindustrialization, Doha Development Round, Edward Glaeser, European colonialism, Fall of the Berlin Wall, financial deregulation, financial intermediation, gender pay gap, Gini coefficient, income inequality, income per capita, labor-force participation, liberal capitalism, minimum wage unemployment, offshore financial centre, open economy, Pareto efficiency, purchasing power parity, race to the bottom, Robert Gordon, Simon Kuznets, structural adjustment programs, The Spirit Level, too big to fail, very high income, Washington Consensus

It does seem that some policies that aim to redistribute income to the underprivileged also reduce the total income of the population as a whole and are therefore economically inefficient. Imposing a marginal tax rate of 90% on all income above a certain threshold would, if this threshold was set low enough, end up stifling an economy’s ability to 5  Note that the concept of efficiency used here is that of “aggregate” efficiency rather than the Pareto efficiency familiar to economists, according to which a situation is efficient if no agent can be made better off without another one being made worse off. In the absence of lump-­sum transfers, there also is a trade-­off between equality and Pareto efficiency. As the argument is a bit more technical, however, we stick to the simpler concept of aggregate efficiency in what follows. Globalization and Costly Inequality131 grow. Similarly, guaranteeing every citizen a relatively high minimum income without any counterbalances would inevitably reduce the total supply of labor in the economy.

See also emerging economies development aid, 148–53, 157 development gap, 34–35, 83 Di Bao program, 166 discrimination: ghettos and, 66– 67; immigrants and, 64, 66, 127; labor and, 64–66, 69, 132, 142, 180–81; non-­material inequalites and, 64–66, 69; racial, 65; women and, 64–65, 103 disinflation, 95, 102, 110 distribution, 10n1, 186; capital-­ labor split and, 55–58, 60; efficiency and, 142–45; evolution of inequality and, 41, 42t, 44t, 45, 46t, 48–59, 64, 71–72; fairer globalization and, 148, 153, 156–73, 175, 178; geographical disequilibria and, 83; Gini coefficient and, 18 (see also Gini coefficient); global, 18–19, 25, 29, 39, 41, 46t, 121, 124–38, 141– 45, 156; growth and, 49–50, 188; international, 17–18, 30, 148; median of, 31; OECD countries and, 10–11, 12n3; policy and, 26, 72, 135, 188; range of, 16; real earnings loss and, 78; redistribution and, 4, 7, 37 (see also redistribution); rise in inequality and, 74, 77–79, 82, 85, 90–92, 94–96, 99, 103–4, 106–7, 112, 114–15; Southern perspective on, 82–85; standard of living and, 16, 18 (see also standard of living); taxes and, 37, 92–94 (see also taxes); Theil coefficient and, 18–19, 37–38, 194 distribution (cont.) 52; transfers and, 4, 14, 48, 105, 110, 130, 135–36, 142, 148, 153, 158–67, 170, 175, 181, 183, 187; wage, 3, 78–79, 107 Divided We Stand report, 52 Doha negotiations, 154 drugs, 66, 133 Dubai, 127 Economic Partnership Agreements (EPAs), 156 education, 34, 187; college, 132; evolution of inequality and, 61, 65–68; fairer globalization and, 149, 152, 167–73, 180–81; globalization and, 132, 140, 143; labor and, 168, 180; Millennium Development Goals and, 149– 50; national inequality and, 167–73; poverty and, 24; preschool, 169–70; redistribution and, 149, 152, 167–73; rise in inequality and, 111; taxes and, 167–73; tuition and, 170 efficiency: data transfer technology and, 78; deregulation and, 94, 96, 105, 108; economic, 1, 4, 6, 111, 116, 119, 129–33, 135, 140–45, 158, 164, 167, 171, 181; emerging economies and, 78; equality and, 116, 129–31; fairness and, 8, 129– 31; globalization and, 1, 4, 6, 8, 36, 78, 94, 96, 105, 108, 111, 116, 118–19, 129–35, 140–45, 157–58, 164, 167, 170–71, 175, 180–81, 188; human capital and, 175; import substitution and, 34, 180; inefficiency and, 105, 129–30, 132–33, 135, 140, 170–71, 180, 188; labor Index and, 175; loss of, 142, 164; opportunity and, 142–45; Pareto, 130n5; privatization and, 94, 96, 105, 108; redistribution and, 142–45; rents and, 180; social tensions and, 188; spontaneous redistribution and, 133; taxes and, 170; technology and, 78; weak institutions and, 36; wealth of nations and, 1 elitism, 182; fairer globalization and, 151, 165; globalization and, 127n4, 136, 138; rise in inequality and, 4, 6–7 emerging economies: Africa and, 122–23 (see also Africa); competition and, 178, 187–88; conditional cash transfers and, 165– 66; credit cards and, 165; domestic markets and, 120, 125; efficient data transfer and, 78; evolution of inequality and, 57; fairer globalization and, 147, 154, 158, 165–66, 177–78, 182; global inequality and, 40, 77– 80, 82, 109, 113, 115, 188–89; globalization and, 117, 119–22, 125–27; institutions and, 109– 12; Kuznets curve and, 113; labor and, 77; natural resources and, 127; profits and, 117; rise in inequality and, 109–12; structural adjustment and, 109– 12; taxes and, 165; trends in, 57; Washington consensus and, 109–10, 153 entrepreneurs, 83, 92, 96, 131–32, 135, 143, 170–71, 188 equality: efficiency and, 116, 129– 31; policy for, 184–89; relative gap and, 18, 28, 30, 31–32, 36 Ethiopia, 21–22, 46t, 155 Index195 European Union (EU), 24, 156, 174, 177 Everything But Arms (EBA) initiative, 155 evolution of inequality: Africa and, 46t, 54–55; Brazil and, 46t, 55, 59, 70; capital and, 55–58, 60, 73; China and, 47, 53, 57–60; consumption and, 42t, 44t; convergence and, 65, 69; credit and, 61; crises and, 48, 50, 54, 57, 73–74; developed countries and, 47, 52–53, 56, 59–64, 66; developing countries and, 47, 53–55, 57, 63, 68; distribution and, 41, 42t, 44t, 45, 46t, 48–59, 64, 71– 72; education and, 61, 65–68; elitism and, 4, 6–7, 46t; emerging economies and, 57; exceptions and, 52–53; France and, 46t, 51f, 52–53, 55, 58, 59n8, 62–63, 66, 70–71; ghettos and, 66–67; Gini coefficient and, 39, 42t, 44t, 48, 50, 51f, 53, 58–59; Great Depression and, 48; growth and, 33, 49–50, 54; India and, 54, 57, 59–60; institutions and, 55, 69; investment and, 56; labor and, 55–58, 60; markets and, 48–50, 53–54, 64, 69; national income inequality and, 48–52; non-­monetary inequalities and, 49, 60–70; normalization and, 41, 43–44; opportunity and, 61–62, 68, 70–71; perceptions of inequality and, 69–73; policy and, 55, 72; primary income and, 48–50, 58; production and, 57; productivity and, 63; profit and, 56; reform and, 54, 72; rise in inequality in, 48–52, 73, 77–80, 91–95, 97–98, 102–8; risk and, 63, 66; standard of living and, 41, 43– 45, 46t, 53–55, 58, 60–62, 67, 69, 73; surveys and, 42t, 43–45, 56, 68n17, 69–71; taxes and, 12–14, 37, 48, 50, 56n5; Theil coefficient and, 42; United Kingdom and, 46t, 50, 51f, 59, 67, 68n17; United States and, 2, 4–6, 9, 11, 21, 33, 46t, 47–50, 51f, 58, 59n9, 66–70, 73; wealth and, 58–60 executives, 73, 88–89, 97, 174 expenditure per capita, 13, 15, 42t, 44t exports: deindustrialization and, 76, 82; fairer globalization and, 147, 154–55, 176, 178; globalization and, 124, 128; rise in inequality and, 76, 82–84 fairer globalization: Africa and, 147, 151, 154–56, 179, 183; African Growth Opportunity Act (AGOA) and, 155; Bolsa Familia and, 166; Brazil and, 150, 154, 166–68, 173; capital and, 158–62, 167, 171, 175, 182; China and, 150, 154, 165–66, 172, 178; competition and, 155, 169, 173, 176–79, 182; consumers and, 177–78; consumption and, 159, 177; convergence and, 146–47, 157; correcting national inequalities and, 158–80; credit and, 164–65, 172, 180; crises and, 163, 176; deregulation and, 173; developed countries and, 150, 154–57, 160, 162, 164, 168–72, 176, 178–79, 181; developing countries and, 154, 166; development aid and, 196 fairer globalization (cont.) 148–53, 157; Di Bao program and, 166; distribution and, 148, 153, 156–73, 175, 178; Economic Partnership Agreements (EPAs) and, 156; education and, 149, 152, 167–73; 180–81; elitism and, 151, 165; emerging economies and, 147, 154, 158, 165–66, 177–78, 182; Everything But Arms (EBA) initiative and, 155; exports and, 147, 154–55, 176, 178; France and, 147, 159–61, 164, 169, 175, 177; Gini coefficient and, 156, 166; goods and services sector and, 180; growth and, 147–52, 155, 162, 167–68, 171, 177, 180, 183; health issues and, 152, 166; imports and, 154, 177–78, 180; India and, 150, 154, 165– 66, 172; inheritance and, 170– 73; institutions and, 151, 168, 174–75; international trade and, 176–77; investment and, 150, 155, 157, 160, 170, 174, 179; liberalization and, 156, 179; markets and, 147–48, 154–58, 168, 173–75, 178–81; Millennium Development Goals and, 149–50; national inequality and, 147, 158; opportunity and, 155, 167, 170, 172; policy and, 147–53, 157, 167–73, 175, 177, 179–83; poverty and, 147–52, 164, 166, 175; prices and, 147– 48, 176, 178, 182; primary income and, 158, 163n10, 167, 173; production and, 155–57, 167, 176, 178–79; productivity and, 155, 177–78; profit and, 173, 176; Progresa program and, Index 166; protectionism and, 7, 147, 154, 157, 176–79; redistribution and, 148, 153, 156–73, 175, 178; reform and, 151, 161, 163, 168–69; regulation and, 152, 173–76, 181–82; risk and, 148, 154, 156, 159, 164, 171, 174–75, 178; standard of living and, 146–48, 154, 156–58, 160, 165, 168–69; surveys and, 169; taxes and, 148, 158–73, 175, 181–83; technology and, 156, 173; TRIPS and, 156; United Kingdom and, 163, 169; United States and, 155, 159–61, 163– 64, 169, 174–75, 182; wealth and, 162, 164, 167, 170–73 Fitoussi, Jean-­Paul, 14 France: evolution of inequality and, 46t, 51f, 52–53, 55, 58, 59n8, 62–63, 66, 70–71; fairer globalization and, 147, 159–61, 164, 169, 175, 177; Gini coefficient of, 20; global inequality and, 2, 9, 11, 20–21; offshoring and, 81; rise in inequality and, 80, 88, 92–93, 95, 97, 99, 103; soccer and, 87; wage deductions and, 159 G7 countries, 56 G20 countries, 182 Garcia-­Panalosa, Cecilia, 107 Gates, Bill, 5–6, 70, 150 Germany, 2, 21, 46t, 50, 51f, 80, 88, 92 Ghana, 46t, 54 ghettos, 66–67 Giertz, Seth, 160–61 Gini coefficient: Brazil and, 22; Current Population Survey and, 21; evolution of inequality and, Index197 39, 42t, 44t, 48, 50, 51f, 53, 58– 59; fairer globalization and, 156, 166; France and, 20; historical perspective on, 27–28; meaning of, 18–19; purchasing power parity and, 28; rise in inequality and, 110; United States and, 21; wealth inequality and, 58–60 Glass-­Steagall Act, 174n15 global distribution, 18–19, 25, 29, 39, 41, 46t, 121, 156 global inequality: Africa and, 16, 21, 23, 30–31, 34, 36; between countries, 2–3, 5, 7, 9, 16–19, 23, 33, 36, 38–39, 42–45, 47, 53, 58, 68, 90–91, 107, 117–19, 123, 128, 153; Brazil and, 21– 23; crises and, 20, 38–41; cross-­ country heterogeneity and, 13; definition of, 3–4, 9–10, 25–26, 30–32, 39; developed countries and, 10–11, 21, 34–39; developing countries and, 10–11, 13, 21, 32, 34–39; effects of, 38–40; emerging economies and, 40, 77–80, 82, 109, 113, 115, 188– 89; at the end of the 2000s, 20– 25; evolution of inequality and, 41 (see also evolution of inequality); expenditure per capita and, 13, 15, 42t, 44t; France and, 2, 9, 11, 20–21; globalization and, 117–18, 121–23, 128; great gap and, 33–36; historic turning point for, 25–32; Human Development Report and, 25; institutions and, 36; measuring, 10– 20; Millennium Development Goals and, 149–50, 185; normalization and, 13, 15, 22–23, 26, 29; OECD Database on Household Income Distribution and Poverty and, 11–12; policy and, 185–89; Povcal database and, 10, 12, 42t, 43, 44t; prices and, 27–28, 74, 80, 84, 91–92, 94, 97, 110; profit and, 13; reduction of, 2, 185–86; relative gap and, 18, 28, 30–32, 36; rise of, 2–4, 7; risk and, 20; standard of living and, 10–26, 29, 31–33, 36, 39; surveys on, 10, 12–15, 20n10, 21–22, 29, 42t, 43–45; technology and, 3–4, 34–35; trend reversal in, 37–38; within countries, 2, 5–7, 9, 16, 30, 33, 35–45, 47, 113–14, 118, 124– 29, 184–85, 189 globalization: Africa and, 122–23, 126–27; Asian dragons and, 34, 82; Brazil and, 127, 133; capital and, 117, 125–26, 132, 137; China and, 120–22, 128; competition and, 117–18, 130, 186 (see also competition); as complex historical phenomenon, 1–2; consumption and, 137–39; convergence and, 120–22, 125; credit and, 131–32, 137–40; crises and, 119–22, 125, 135–39, 142; debate over, 1; deindustrialization in developed countries and, 75–82; democratic societies and, 135–36; deregulation and, 95–99; developed countries and, 117, 119, 121, 127n4, 128, 133, 143; developing countries and, 121, 127n4, 128, 132, 143; education and, 132, 140, 143; efficiency and, 1, 4, 6, 8, 36, 78, 94, 96, 105, 108, 111, 116, 118–19, 129–35, 140–45, 157–58, 164, 167, 170–71, 175, 180–81, 188; elitism and, 127n4, 136, 138; 198 globalization (cont.) emerging economies and, 117, 119–22, 125–27; exports and, 124, 128; fairer, 146–83 (see also fairer globalization); future of inequality between countries and, 119–22; global inequality and, 117–18, 121–23, 128; goods and services sector and, 127, 130; growth and, 118–29, 134–39; health issues and, 140– 41, 144; Heckscher-­Ohlin model and, 76; imports and, 119, 124; inequality within countries and, 124–29; inheritance and, 144–45; institutions and, 124; as instrument for modernization, 1; international trade and, 3, 75–76, 78–79, 83, 112, 114, 176–77; investment and, 119, 130, 134–35, 143; laissez-­faire approach and, 118, 129; markets and, 118, 120–21, 124–37, 140, 143–44; as moral threat, 1; national inequality and, 119; negative consequences of inequality and, 131–42; opportunity and, 133–34, 139, 142–44; as panacea, 1; policy and, 118–19, 124, 126, 128–31, 139, 143–44; poverty and, 117, 123, 126–27, 134, 144; prices and, 118, 122, 126, 136–38; primary income and, 135, 143–44; production and, 119, 124, 126, 129, 131, 133, 137; productivity and, 120, 125, 127, 144; profit and, 117; redistribution and, 121, 124–38, 141–45; reform and, 124, 126–27, 138; regulation and, 136; rise in inequality and, 117–18; risk and, 127–28, Index 137–39, 144; shocks and, 38, 55, 91–92, 175; Southern perspective on, 82–85; standard of living and, 120–23, 126, 138, 143; surveys and, 127n4, 141n15; taxes and, 74, 89n10, 91–94, 104, 114–15, 129–30, 135–36, 142–45; technology and, 86–91, 118–20, 125; trends and, 118; United States and, 135–39; wealth and, 74, 95, 98, 125, 127, 129, 131–32, 139, 143–45 Great Depression, 48 Greece, 46t, 135 gross domestic product (GDP) measurement: Current Population Survey and, 21; evolution of inequality and, 41–45, 56–57; fairer globalization and, 123, 127, 165–66, 176; global inequality and, 13–15, 20–21, 23, 26, 27f, 29–30, 39; normalization and, 29, 41, 43–45; rise in inequality and, 94; Sen-­Stiglitz-­ Fitoussi report and, 14 Gross National Income (GNI), 148–49 Growing Unequal report, 52 growth, 4; African Growth Opportunity Act (AGOA) and, 155; constraints and, 35; consumption and, 13–15, 42t, 44t, 80, 137–39, 159, 177; convergence and, 16; determinants of, 34; distribution and, 49–50, 188; emerging economies and, 125 (see also emerging economies); evolution of inequality and, 33, 49–50, 54; fairer globalization and, 147–52, 155, 162, 167–68, 171, 177, 180, 183; GDP mea- Index199 surement of, 30, 39 (see also gross domestic product (GDP) measurement); globalization and, 118–29, 134–39; great gap in, 33–36; import substitution and, 34, 180; inflation and, 50, 95, 102, 110; negative, 31; political reversals and, 36; poverty and, 28–29; production and, 3, 34–35, 57, 74, 76–81, 84–86, 119, 124, 126, 129, 131, 133, 137, 155–57, 167, 176, 178–79; rate of, 15, 29–35, 79, 125, 185; recession and, 6, 31, 99, 120; relative gap and, 18, 20, 30–32, 36; rise in inequality and, 75, 79, 82, 84, 109–12; trends in, 40, 121 health issues, 24, 187; fairer globalization and, 152, 166; globalization and, 140–41, 144; public healthcare and, 37, 111, 140 Heckscher-­Ohlin model, 76 Hong Kong, 34, 82, 174 housing, 12, 61, 137 human capital, 74, 167, 175 Human Development Report, 25 Ibrahimovich, Zlata, 87 IKEA, 172 immigrants, 64, 66, 127 imports: fairer globalization and, 154, 177–78, 180; globalization and, 119, 124; import substitution and, 34, 180; rise in inequality and, 80 income: average, 9, 18, 21, 29–30, 43, 72; bonuses and, 87, 174; convergence and, 16; currency conversion and, 11; definition of, 45; deindustrialization and, 75–82; developed/developing countries and, 5, 36; disposable, 20, 22, 24, 48, 50, 51f, 74, 91, 163; distribution of, 3 (see also distribution); executives and, 73, 88–89, 97, 174; family, 10; financial operators and, 87–88, 90–91; gap in, 3, 5–6, 27f, 33– 36, 42t, 44t, 149; GDP measurement and, 13–15, 20–21, 23, 26, 27f, 29–30, 39, 41–45, 56–57, 94, 123, 127, 165–66, 176; high, 50, 52, 56, 85–93, 97–99, 140, 143, 158–62, 164, 189; household, 10–12, 43, 45, 50, 58, 105, 107, 137, 163, 177; inequality in, 2, 4, 41, 48–50, 56–64, 68, 70, 72–73, 83, 98, 102–3, 107–8, 114, 125, 132– 34, 137, 140–41, 143–44, 163; inflation and, 50, 95, 102, 110; international scale for, 17–18, 23, 30; lawyers and, 89–90; mean, 17, 20n10, 27f, 42t, 44t; median, 6, 49, 71, 102–3, 106; minimum wage and, 52–53, 100, 102–8, 175, 177; national, 7, 16–19, 30, 43, 48–52, 60, 73, 84n6, 125, 149, 153, 172; OECD Database on Household Income Distribution and Poverty and, 11; opportunity and, 5; payroll and, 53, 93, 100, 104, 107, 175; pension systems and, 167; per capita, 20, 25, 29–30, 42t, 45, 48, 55–56, 120; portfolios and, 88; poverty and, 1, 11, 15n6, 19–20, 22–25, 28–29, 32, 44t, 109, 117, 123, 126–27, 134, 144, 147–52, 164, 166, 175; primary, 48–50, 58, 135, 143–44, 158, 163n10, 167, 173; 200 income (cont.) purchasing power and, 11, 13, 19–24, 27f, 28, 50, 80, 144, 158, 178; real earnings loss and, 78; relative gap and, 18, 28, 30, 31– 32, 36; superstars and, 85–87, 89–90; taxes and, 37, 89n10, 92–93, 145, 159, 161–65, 170 (see also taxes); technology and, 34, 180; virtual, 12; wage inequality and, 51–53, 79, 101–3, 106, 108; wage ladder effects and, 78–79; wealth inequality and, 58–60; women and, 64– 65, 103 India: evolution of inequality and, 54, 57, 59–60; fairer globalization and, 150, 154, 165– 66, 172; household consumption and, 15; international trade and, 75; Kuznets hypothesis and, 113; rise in inequality and, 2, 15–16, 19, 30, 34, 46t, 75, 83, 90, 112–13; taxes and, 165 Indonesia, 30, 46t, 54, 111, 127 industrialization: deindustrialization and, 1, 75–82, 102, 120, 188; labor and, 1, 26, 29, 33, 35, 54, 82, 84, 102, 113, 120, 127, 179, 188 Industrial Revolution, 26, 29, 33, 35 inequality: between countries, 2–3, 5, 7, 9, 16–19, 23, 33, 36, 38– 39, 42–45, 47, 53, 58, 68, 90– 91, 107, 117–19, 123, 128, 153; efficiency and, 1, 4, 6, 8, 36, 78, 94, 96, 105, 108, 111, 116, 118– 19, 129–35, 140–45, 157–58, 164, 167, 170–71, 175, 180–81, 188; Gini coefficient and, 18 (see Index also Gini coefficient); income, 2, 4, 41, 48–50, 56–64, 68, 70, 72–73, 83, 98, 102–3, 107–8, 114, 125, 132–34, 137, 140–41, 143–44, 163; international, 17; inverted U curve and, 54, 113; measurement of, 18; negative consequences of, 131–42; non-­ monetary, 49, 60–70; perceptions of, 69–73; social tensions and, 188; standard of living and, 18 (see also standard of living); Theil coefficient and, 18–19, 37–38, 42; wealth, 58–60; within countries, 2, 5–7, 9, 16, 30, 33, 37–45, 47, 113–14, 118, 124–29, 184–85, 189 infant mortality, 150 inflation, 50, 95, 102, 110 inheritance: fairer globalization and, 170–73; globalization and, 144–45; rise in inequality and, 93 institutions: deregulation and, 91– 112 (see also deregulation); disinflation and, 95, 102, 110; emerging economies and, 109– 12; evolution of inequality and, 55, 69; fairer globalization and, 151, 168, 174–75; global inequality and, 36; globalization and, 124; markets and, 91–92; privatization and, 94–109; reform and, 91–112; rise in inequality and, 91–112, 114; structural adjustment and, 109– 12; taxes and, 92–94; “too big to fail” concept and, 174–75; Washington consensus and, 109–10, 153 International Development Association, 149 Index201 international income scale, 17–18, 23, 30 International Labor Organization, 51 International Monetary Fund (IMF), 54, 57, 84, 90, 109–10 international trade: capital mobility and, 74; China and, 75; de­ industrialization and, 75–76, 78–79; effect of new players, 75–76; Heckscher-­Ohlin model and, 76; India and, 75; offshoring and, 81–82; rise in inequality and, 75–76, 78–79, 83, 112, 114; Soviet Union and, 75; theory of, 76; wage ladder effects and, 78–79 inverted U curve, 54, 113 investment: direct, 76, 79; evolution of inequality and, 56; fairer globalization and, 150, 155, 157, 160, 170, 174, 179; foreign, 83, 85, 112, 155, 157, 160, 179; globalization and, 119, 130, 134– 35, 143; production and, 119; public services and, 143; re-­ investment and, 56; rise in inequality and, 76, 79, 82–83, 85, 92, 97–98, 112; taxes and, 92 Ivory Coast, 54 Japan, 34, 46t, 51f, 103 job training, 34, 181, 187 Kenya, 46t, 54 kidnapping, 133 Kuznets, Simon, 113, 126 labor: agriculture and, 12, 82, 84, 122–23, 127–28, 132, 155; artists and, 86–87; bonuses and, 87, 174; capital and, 3–4, 55– 58, 60, 158, 161n7, 185; capital mobility and, 3; cheap, 77, 117; costs of, 81, 100, 104–5, 117, 176, 187; decline in share of national income and, 73; deindustrialization and, 75–82; demand for, 168; deregulation and, 99– 109; discrimination and, 64–66, 69, 132, 142, 180–81; distribution of income and, 175 (see also distribution); education and, 168, 180; efficiency and, 96–97, 175; emerging economies and, 77; entrepreneurs and, 83, 92, 96, 131–32, 135, 143, 170–71, 188; evolution of inequality and, 55–58, 60; excess, 81, 83; executives and, 73, 88–89, 97, 174; goods and services sector and, 13, 73, 80, 85, 91, 102, 127, 130, 180; growth and, 154, 179; immigrant, 64, 66, 127; increased mobility and, 90–91; industrialization and, 1, 26, 29, 33, 35, 54, 80, 82, 84, 102, 113, 120, 127, 179, 188; inflation and, 50, 95, 102, 110; International Labor Organization and, 51; job training and, 34, 181, 187; manufacturing and, 57, 80–82, 84, 123, 154–55, 157; median wage and, 49, 71, 102– 3, 106; minimum wage and, 52– 53, 100, 102–8, 175, 177; mobility of, 185; offshoring and, 81–82; payroll and, 53, 93, 100, 104, 107, 175; pension systems and, 167; portfolios and, 88; poverty and, 1, 11, 15n6, 19– 20, 22–25, 28–29, 32, 44t, 109, 117, 123, 126–27, 134, 144, 147–52, 164, 166, 175; 202 labor (cont.) privatization and, 99–109; productivity and, 63, 79, 81–82, 89, 100, 102, 104, 114, 120, 125, 127, 144, 155, 177–78; protectionism and, 7, 147, 154, 157, 176–79; real earnings loss and, 78; reserve, 84; security and, 133; skilled, 76–78, 82–83, 86, 90, 114, 117, 126, 176; standard of living and, 69 (see also standard of living); superstars and, 85, 87, 89–90; supply of, 130– 31, 164; taxes and, 159–60, 171; technology and, 85–91 (see also technology); unemployment and, 37, 39, 53, 62–63, 66, 69, 77, 94, 100–108, 164, 175–76; unions and, 100–106, 108, 156, 179; unskilled, 3, 76–77, 79, 83, 105, 117, 154; wage inequality and, 51–53, 79, 101–3, 106, 108; wage ladder effects and, 78–79; women and, 64–65, 103, 114; writers and, 86–87 Lady Gaga, 5–6 laissez-­faire approach, 118, 129 Latin America, 9, 34, 36, 54–55, 58, 109–11, 155, 165–66, 168, 180 lawyers, 89–90 liberalization: capital and, 96; customs, 156; deregulation and, 96–99, 108–9, 112 (see also deregulation); fairer globalization and, 156, 179; mobility of capital and, 115; policy effects of, 97–99; Reagan administration and, 91; recession and, 6, 31, 99, 120; rise in inequality and, 76, 91, 93, 96–99, 108–9, 112, 115; tax rates and, 93 Luxembourg, 16, 19 Index Madonna, 71 Malaysia, 127 manufacturing: deindustrialization and, 75–82, 84, 123; emerging economies and, 57, 84; fairer globalization and, 154–55, 157; France and, 81; offshoring and, 81–82; United Kingdom and, 80; United States and, 80 markets: competition and, 76–77, 79–82, 84, 86, 94–98, 102, 104, 115–18, 130, 155, 169, 173, 176–79, 182, 186–88; credit, 131; deindustrialization and, 1, 75–82, 102, 120, 188; deregulation and, 91–92, 99–109 (see also deregulation); development gap and, 34–35, 83; Economic Partnership Agreements (EPAs) and, 156; effect of new players, 75–76; emerging economies and, 120 (see also emerging economies); entrepreneurs and, 83, 92, 96, 131–32, 135, 143, 170–71, 188; evolution of inequality and, 48–50, 53–54, 64, 69; exports and, 76, 82–84, 124, 128, 147, 154–55, 176, 178; fairer globalization and, 147–48, 154–58, 168, 173–75, 178–81; GDP measurement and, 13–15, 20–21, 23, 26, 27f, 29–30, 39, 41–45, 56–57, 94, 123, 127, 165–66, 176; globalization and, 35, 118, 120–21, 124–37, 140, 143–44; Heckscher-­Ohlin model and, 76; housing, 12, 61, 137; imports and, 1, 34, 80, 119, 124, 154, 177–78, 180; institutions and, 91–112; international trade and, 3, 75–76, 78–79, 83, 112, 114, 176–77; labor and, Index203 144 (see also labor); liberalization and, 112 (see also liberalization); monopolies and, 94, 111, 127, 136; offshoring and, 81– 82; protectionism and, 7, 147, 154, 157, 176–79; purchasing power and, 11, 13, 19–24, 27f, 28, 50, 80, 144, 158, 178; reform and, 54 (see also reform); regulation and, 74 (see also regulation); rise in inequality and, 74, 76– 79, 83, 86, 90–112, 114; shocks and, 38, 55, 91–92, 175; single market and, 76; South-­South exchange and, 35; TRIPS and, 156 median wage, 49, 71, 102–3, 106 Mexico, 46t, 57, 59, 109–10, 133, 166, 172 middle class, 51, 71, 93, 109, 133– 34, 136, 140 Milanovic, Branko, 4–5, 17n8, 29n16 Millennium Development Goals, 149–50, 185 minerals, 84, 127 minimum wage, 52–53, 100, 102– 8, 175, 177 monopolies, 94, 111, 127, 136 Morocco, 173 Morrisson, Christian, 28 movies, 87 Murtin, Fabrice, 28 national inequality, 2–4; correcting, 158–80; education and, 167–73; fairer globalization and, 147, 158; Gini coefficient and, 27 (see also Gini coefficient); globalization and, 119; market regulation and, 173–75; protectionism and, 147, 157, 176–79; redistribution and, 158–73, 175, 178; rise in, 6, 48– 52, 115, 204; taxes and, 158–73, 175, 181–83 natural resources, 84–85, 92, 122, 126–28, 127, 151 Netherlands, 46t, 50, 66, 70, 102 Nigeria, 9, 46t, 54, 127, 151 non-­monetary inequalities: access and, 61, 67–68; capability and, 61; differences in environment and, 66–68; discrimination and, 64–66, 69; employment precariousness and, 63–64; evolution of inequality and, 49, 60–70; intergenerational mobility and, 68; opportunities and, 49, 60– 70; social justice and, 60, 70; unemployment and, 62–63 normalization: evolution of inequality and, 41, 43–44; GDP measurement and, 29, 41, 43– 45; global inequality and, 13, 15, 22–23, 26, 29 Occupy Wall Street movement, 6, 135 OECD countries, 27t; evolution of inequality and, 42t, 43, 44t, 50– 52, 64, 65n13; fairer globalization and, 149, 159, 162, 164– 65; Gini coefficient and, 51; income distribution and, 51; relaxation of regulation and, 99; restrictive, 64; rise in inequality and, 50–51, 94, 99, 102, 106n18, 107; social programs and, 94; standard of living and, 11–12, 43, 50–52, 64, 94, 99, 102, 107, 120, 149, 159, 162, 164–65; U-­shaped curve on income and, 50 OECD Database on Household 204 Income Distribution and Poverty, 11–12 offshoring, 81–82 oil, 92, 127 opportunity, 5; African Growth Opportunity Act (AGOA) and, 155; as capability, 61; efficiency and, 142–45; evolution of inequality and, 61–62, 68, 70–71; fairer globalization and, 155, 167, 170, 172; globalization and, 133–34, 139, 142–44; redistribution and, 142–45; rise in inequality and, 102 Pakistan, 46t, 111 Pareto efficiency, 130n5 Pavarotti, Luciano, 86–87 payroll, 53, 93, 100, 104, 107, 175 Pearson Commission, 149 pension systems, 167 Perotti, Roberto, 134 Philippines, 46t, 111 Pickett, Kate, 140 Piketty, Thomas, 4, 48, 59n8, 60, 89n10, 125, 160n4 PISA survey, 169–70 policy, 4; adjustment, 109, 153; Cold War and, 149, 153; convergence and, 147–48; development aid and, 148–53; distributive, 26, 72, 135, 188; educational, 149, 152, 167–73; evolution of inequality and, 55, 72; fairer globalization and, 147–53, 157–58, 167–73, 175–83; Glass-­Steagall Act and, 174n15; global inequality and, 185–89; globalization and, 118–19, 124, 126, 128–31, 139, 143–44; globalizing equality and, 184–89; import substi- Index tution and, 34; Millennium Development Goals and, 149– 50, 185; poverty reduction and, 147–48; protectionist, 7, 99– 100, 107–8, 147, 154, 157, 176–79; reform and, 74 (see also reform); rise in inequality and, 34, 74–75, 85, 94, 97, 99– 100, 104, 106–11, 114–16; social, 7; standard of living and, 147–48 population growth, 28–29, 110, 183 portfolios, 88 Povcal database, 10, 12, 42t, 43, 44t poverty, 1, 44t, 109; Collier on, 23; convergence and, 147–48; criminal activity and, 133–34; definition of, 24; development aid and, 147–52; fairer globalization and, 147–52, 164, 166, 175; ghettos and, 66–67; global inequality and, 11, 15n6, 19–20, 22–25, 28–29, 32; globalization and, 117, 123, 126–27, 134, 144; growth and, 28–29; measurement of, 23–24; Millennium Development Goals and, 149– 50, 185; OECD Database on Household Income Distribution and Poverty and, 11–12; reduction policies for, 147–48; traps of, 144, 150, 164 prices: commodity, 84, 182; exports and, 178; factor, 74, 126; fairer globalization and, 147–48, 176, 178, 182; global inequality and, 27–28, 74, 80, 84, 91–92, 94, 97, 110; globalization and, 118, 122, 126, 136–38; imports and, 80; international compari- Index205 sons of, 11; lower, 94, 137; oil, 92; rise in inequality and, 74, 80, 84, 91–92, 94, 97, 110; rising, 110, 122, 178; shocks and, 38, 55, 91–92, 175; statistics on, 11, 27; subsidies and, 109–10, 175 primary income: evolution of inequality and, 48–50, 58; fairer globalization and, 158, 163n10, 167, 173; globalization and, 135, 143–44 privatization: deregulation and, 94–112; efficiency and, 94, 96, 105, 108; globalization of finance and, 95–99; institutions and, 94–109; labor market and, 99–109; reform and, 94–109; telecommunications and, 111 production: deindustrialization and, 75–82; evolution of inequality and, 57; fairer globalization and, 155–57, 167, 176, 178–79; globalization and, 119, 124, 126, 129, 131, 133, 137; growth and, 3, 34–35, 57, 74, 76–81, 84–86, 119, 124, 126, 129, 131, 133, 137, 155–57, 167, 176, 178–79; material investment and, 119; North vs.


pages: 193 words: 47,808

The Flat White Economy by Douglas McWilliams

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access to a mobile phone, banking crisis, Big bang: deregulation of the City of London, bonus culture, Chuck Templeton: OpenTable, cleantech, cloud computing, computer age, correlation coefficient, Edward Glaeser, en.wikipedia.org, Erik Brynjolfsson, eurozone crisis, George Gilder, hiring and firing, income inequality, informal economy, knowledge economy, loadsamoney, low skilled workers, mass immigration, Metcalfe’s law, Network effects, new economy, offshore financial centre, Pareto efficiency, Peter Thiel, Productivity paradox, Robert Metcalfe, Silicon Valley, smart cities, special economic zone, Steve Jobs, working-age population, zero-sum game

One reason for this is that some of those concerned with the gap between London and the rest of the UK are not especially concerned with whether the London economy is beneficial for the rest of the country as such, but are simply concerned about the inequality between the two. This is out of line with the teachings of traditional welfare economics which have adopted the Pareto principle. The Pareto principle is that a change that makes no one worse off and some people better off is a change for the better (a Pareto efficient improvement). But if inequality is the concern, so-called ‘Pareto-efficient’ changes may or may not be an improvement depending on the initial positions of those made better off.10 Many modern commentators seem to think that inequality in itself is the evil to be avoided, regardless of its cause11 despite the inconsistency of this approach with a fairly long tradition of welfare economics. One reason why some of the modern theorists of inequality think that it is a problem in itself is the concept of relative poverty.

Crafts Working Paper No. 03/04, Department of Economic History London School of Economics, March 2004. 8. www.zerohedge.com/news/2014–02-20/uks-2-tier-economy-london-and-everyone-else 9. ‘The London Problem’, Danny Dorling, New Statesman 29 August – 04 September 2014, pp27-31. 10. This concept is described in most economics textbooks. See for example: www.princeton.edu/~achaney/tmve/wiki100k/docs/Pareto_efficiency.xhtml 11. See for example the website: Inequality.org. 12. www.economist.com/news/britain/21637420-green-party-growing-force-british-politics-if-only-it-was-more-world-green (3 January 2015) 13. www.economist.com/news/britain/21637420-green-party-growing-force-british-politics-if-only-it-was-more-world-green (3 January 2015) 14. www.independent.co.uk/news/uk/politics/green-party-leader-i-didnt-say-being-on-benefits-in-britain-was-worse-than-being-poor-in-india-9950573.xhtml 15 See for example ‘Measuring Government in the Twenty First Century’ by Livio de Matteo, 2013 from the Fraser Institute in Canada.


pages: 226 words: 59,080

Economics Rules: The Rights and Wrongs of the Dismal Science by Dani Rodrik

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airline deregulation, Albert Einstein, bank run, barriers to entry, Bretton Woods, butterfly effect, capital controls, Carmen Reinhart, central bank independence, collective bargaining, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Donald Davies, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, Fellow of the Royal Society, financial deregulation, financial innovation, floating exchange rates, fudge factor, full employment, George Akerlof, Gini coefficient, Growth in a Time of Debt, income inequality, inflation targeting, informal economy, information asymmetry, invisible hand, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labor-force participation, liquidity trap, loss aversion, low skilled workers, market design, market fundamentalism, minimum wage unemployment, oil shock, open economy, Pareto efficiency, Paul Samuelson, price stability, prisoner's dilemma, profit maximization, quantitative easing, randomized controlled trial, rent control, rent-seeking, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, school vouchers, South Sea Bubble, spectrum auction, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, trade liberalization, trade route, ultimatum game, University of East Anglia, unorthodox policies, Vilfredo Pareto, Washington Consensus, white flight

It all depends on the “price elasticities” of demand and supply. With the addition of a longish list of extra assumptions—on which, more later—this model also generates rather strong implications about how well markets work. In particular, a competitive market economy is efficient in the sense that it is impossible to improve one person’s well-being without reducing somebody else’s. (This is what economists call “Pareto efficiency.”) Consider now a very different model, called the “prisoners’ dilemma.” It has its origins in research by mathematicians, but it is a cornerstone of much contemporary work in economics. The way it is typically presented, two individuals face punishment if either of them makes a confession. Let’s frame it as an economics problem. Assume that two competing firms must decide whether to have a big advertising budget.

It says, in brief, that a competitive market economy is efficient. More precisely, under the stated assumptions of the theorem, the market economy delivers as much economic output as any economic system possibly could. There is no way to improve on this outcome, in the sense that no reshuffling of resources could possibly leave someone better off without making some others worse off.* Note that this definition of efficiency—Pareto efficiency, named after the Italian polymath Vilfredo Pareto—pays no attention to equity or other possible social values: a market outcome in which one person receives 99 percent of total income would be “efficient” as long as his losses from any reshuffle exceeded the gains that would accrue to the rest of society. Distributional complications aside, this is a powerful result—one that is not obvious.

.: CCT program in, 4 congestion pricing and, 2–3 New York Times, 136 Nobel Prize, 31, 32, 33, 49n, 50, 69, 131, 136, 154, 157, 203, 208 North, Douglass, 98 Obama, Barack, 135, 152 offshoring, 141 Ohlin, Bertil, 139 oil industry: OPEC and, 130–31 price controls in, 94–97 supply and demand in, 14, 99 value theory and, 119–20 Ollion, Etienne, 79n, 200n “On Exactitude in Science” (Borges), 43–44 Oportunidades, 4, 105 opportunity costs, 70 Organization for Economic Co-operation and Development (OECD), 109, 164 Organization of Petroleum Exporting Countries (OPEC), 130 Ostrom, Elinor, 203n output, economic, business cycles and, 126 outsourcing, 149, 194 Oxford University, 197n, 198 Pakistan, 106 panics, financial, 155 parables, models and, 20 Pareto, Vilfredo, 48 Pareto efficiency, xiii, 14, 48 partial-equilibrium (single market) analysis, 56, 58, 91 Passions and the Interest, The (Hirschman), 195 patents, 151 path dependence, 42, 43 Pauli, Wolfgang, 80 perfectly competitive market models, 21, 27, 28, 47, 69n, 71, 122, 180 personal distribution of income, 121 Peterson Institute, 159 Pfleiderer, Paul, 26 “Physicist Experiments with Cultural Studies, A” (Sokal), 79n physics, theories and, 113 pluralism, economics and, 196–208 political science, mathematics and, 30–31, 34 Pollin, Robert, 77 pollution, carbon emissions and, 188–90, 191–92 Portugal, 207 comparative advantage principle and, 52–53 positive spillovers, 100 positivism, 81 Posner, Richard, 152 possibilism, 210n–11n “Possibilism: An Approach to Problem-Solving Derived from the Life and Work of Albert O.

State-Building: Governance and World Order in the 21st Century by Francis Fukuyama

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Asian financial crisis, Berlin Wall, Bretton Woods, centre right, corporate governance, demand response, Doha Development Round, European colonialism, failed state, Fall of the Berlin Wall, Francis Fukuyama: the end of history, George Akerlof, Hernando de Soto, information asymmetry, liberal world order, Live Aid, Nick Leeson, Pareto efficiency, Potemkin village, price stability, principal–agent problem, rent-seeking, road to serfdom, Ronald Coase, structural adjustment programs, technology bubble, The Market for Lemons, The Nature of the Firm, transaction costs, Washington Consensus, Westphalian system

The three sources of organizational ambiguity discussed above—limited rationality in setting organizational goals, alternative approaches to the control of agent behavior, and uncertainty as to how much discretion to delegate—are all related to this issue. Ambiguity implies that there are no theoretically optimal ways of specifying decision rights within an organization. Everything depends on context, past history, the identity of organizational players, and a host of other independent variables. Instead of equilibria or Pareto optimal solutions to organizational problems, there are continuous tradeoffs along a series of design dimensions. The discipline of economics is characterized by a large body of abstract theory that postulates universal rules of human behavior. When applied to markets, that theory is robust enough to specify conditions of both equilibrium and optimality. It is also rigorously empirical and has clear standards for hypothesis testing and the use of data.

In the words of Levitt and March (1990, 13), The Barnard strategy . . . include[s] conscious attention to the transformation of preferences. Changing motives is seen to be an important part of management, as is the creation of new moral codes. In modern terms, Barnard proposed that an executive create and sustain a culture of beliefs and values that would support cooperation. The appeal is not to exchanges, Pareto optimality, or the search for incentive schemes; it is to the construction of a moral order in which individual participants act in the name of the institution—not because it is in their self-interest to do so, but because they identify with the institution and are prepared to sacrifice some aspect of themselves for it. Barnard also anticipated Simon’s observations about limited rationality in organizations.

The Haves and the Have-Nots by Branko Milanovic

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Berlin Wall, Branko Milanovic, colonial rule, crony capitalism, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, endogenous growth, Fall of the Berlin Wall, financial deregulation, full employment, Gini coefficient, high net worth, illegal immigration, income inequality, income per capita, Joseph Schumpeter, means of production, open borders, Pareto efficiency, Plutocrats, plutocrats, purchasing power parity, Simon Kuznets, very high income, Vilfredo Pareto, Washington Consensus, zero-sum game

This disposition was reinforced rather than mitigated by his classic education that made the ancient world as familiar to him as were his own Italy and France—the rest of the world just [barely] existed for him.8 Pareto wrote two influential (text)books of economics and is today, in the economics profession, remembered essentially for two contributions: Pareto improvement (or Pareto optimum) and Pareto’s “law” of income distribution. The first term is used by economists almost daily; it has become part of the indispensable economic tool kit. It simply indicates that a certain change will be socially acceptable only if the welfare of each person is thereby either improved or left as it was. Basically, somebody has to gain and nobody must lose. Finding economic policies (changes) of this kind is all but impossible because almost invariably somebody loses. Thus, the Pareto improvement requirement is a tough one; it is in reality a plea for the status quo (see Essay I). Pareto’s “law” of income distribution was generated from empirical observations.

Obama, Hussein Onyango Oblonsky, Stepan Oceania Octavian, Augustus (Emperor) OECD. See Organization for Economic Cooperation and Development One Thousand and One Nights Oregon Organization for Economic Cooperation and Development (OECD) Orwell, George Overcoat (Gogol) Pakistan Pallas, Marcus Antonius Panama Pan-European revolution (1848) Papua New Guinea Pareto, Vilfredo background of income distribution and “law” of income distribution of Pareto improvement (Pareto optimum) and Paris, France income distribution in wealth distribution in Parisian arrondissements Persian Gulf Peru Pharmaceutical companies Philippines Piketty, Thomas Pinçon, Michel Pinçon-Charlot, Monique Place of birth. See Citizenship Plato Poland Political parties Poor education and global inequality and government spending and investment and redistribution and social arrangements and taxation and Poor countries globalization and migration from technology and trade and Portugal Poverty alleviation of PPP.


pages: 88 words: 25,047

The Mathematics of Love: Patterns, Proofs, and the Search for the Ultimate Equation by Hannah Fry

Brownian motion, John Nash: game theory, linear programming, Nash equilibrium, Pareto efficiency, recommendation engine, Skype, statistical model

Instead, they just want to end up with the highest scores, or ‘pay-offs’, from their relationship. These pay-offs are determined for each partner by the different strategies they choose to follow, and can be displayed in a table like that below – what’s known in mathematics as a ‘Pay-off Matrix’. The best outcome for everyone is when Don and Betty manage to maintain a faithful relationship. In that scenario (which is ‘Pareto optimal’), both parties will get something positive from the relationship. For the purpose of illustration, let’s imagine they both gain 10 pay-off points in this scenario. Remember, Don and Betty both want to end up with the most points possible from their relationship. In this game, though, as in reality, there will always be some temptation to cheat on your partner. If Don decides to cheat, he might be able to maintain his relationship with Betty while keeping his bit on the side and increase his own pay-off points to 20.


pages: 371 words: 36,271

Libertarian Idea by Jan Narveson

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centre right, invisible hand, means of production, Menlo Park, night-watchman state, Pareto efficiency, Peter Singer: altruism, prisoner's dilemma, psychological pricing, rent-seeking, zero-sum game

In such a situation each agent simply aims to maximize her utility from her own production and exchange activities, and the result will be terrific for everybody: the Invisible Hand lives! Several very nicesounding things are provable3 about a market so characterized, notably, that the society thus blessed maximizes its utility—a result not to be confused, however, with what utilitarians mean by that expression. Given this ideal market, all changes are Pareto-optimal. What is meant by “the market society maximizes its utility” is that at any particular time no one can do better than has been done without someone else‟s doing worse. I agree with Gauthier that the theoretical demonstration of optimality under these conditions is of real importance. But its practical importance is obviously a function of the degree to which these conditions are realized or realizable in the real world, and it is here that morality must enter the picture.

John Harsanyi points out that when demand exceeds supply, prices rise, giving people an incentive to increase supply and thus to decrease the demand. “As a result equilibrium . . . will be reestablished at a new higher level of supply, at or close to what its Paretooptimal level would be under the new conditions. . . . Yet, if factor rents were taxed away, these forces in the economy would be very seriously impaired, and the economy would move away further and further from Pareto optimality.”30 This important observation is related to the complaint I have just been making. The entire fabric of supply and demand is predicated on the freedom of individuals to make and accept or reject such offers as they may. If we are going to claim that they are not entitled to those whenever, and simply because, they might be willing to settle for the amount they would be left with after confiscating some portion, we do not have a nation of free participants in the economy, whatever else we have.

The existence of the latter option, at least in principle, is important. James Buchanan, discussing the problems raised by the use of unanimity rules in large public-goods contexts, points out that “if those persons who do not choose to join in collective arrangements under which all cost-sharing decisions are to be made unanimously . . . can be excluded from any enjoyment of the subsequent benefits of public-goods provision, Pareto optimality or efficiency will tend to be attained voluntarily even in the pure public-goods cases.”5 This would not be terribly difficult to do for a scheme like OHIP, and in fact an opt-out scheme would be quite practical. If we 260 suppose that almost nobody would opt out, then it is reasonable to argue that the whole scheme fits the requirements of liberty. Consider now the difference between the 4 percent administrative overhead in Ontario and the 15 percent overhead in, say, California.


The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory by Kariappa Bheemaiah

accounting loophole / creative accounting, Ada Lovelace, Airbnb, algorithmic trading, asset allocation, autonomous vehicles, balance sheet recession, bank run, banks create money, Basel III, basic income, Ben Bernanke: helicopter money, bitcoin, blockchain, Bretton Woods, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, cashless society, cellular automata, central bank independence, Claude Shannon: information theory, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, complexity theory, constrained optimization, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, David Graeber, deskilling, Diane Coyle, discrete time, distributed ledger, diversification, double entry bookkeeping, ethereum blockchain, fiat currency, financial innovation, financial intermediation, Flash crash, floating exchange rates, Fractional reserve banking, full employment, George Akerlof, illegal immigration, income inequality, income per capita, inflation targeting, information asymmetry, interest rate derivative, inventory management, invisible hand, John Maynard Keynes: technological unemployment, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, knowledge economy, labour market flexibility, large denomination, liquidity trap, London Whale, low skilled workers, M-Pesa, Marc Andreessen, market bubble, market fundamentalism, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, natural language processing, Network effects, new economy, Nikolai Kondratiev, offshore financial centre, packet switching, Pareto efficiency, pattern recognition, peer-to-peer lending, Ponzi scheme, precariat, pre–internet, price mechanism, price stability, private sector deleveraging, profit maximization, QR code, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, Real Time Gross Settlement, rent control, rent-seeking, Satoshi Nakamoto, Satyajit Das, savings glut, seigniorage, Silicon Valley, Skype, smart contracts, software as a service, software is eating the world, speech recognition, statistical model, Stephen Hawking, supply-chain management, technology bubble, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Nature of the Firm, the payments system, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, trade liberalization, transaction costs, Turing machine, Turing test, universal basic income, Von Neumann architecture, Washington Consensus

.: a proactive decision; (iv) basing the decision on personal experience or hard-wired knowledge (Russell and Norvig, 2009). Different agents will embody different nomenclatures of these trade-offs. The First Welfare Theorem: Every Walrasian equilibrium allocation is Pareto efficient. The Second Welfare Theorem: Every Pareto efficient allocation can be supported as a Walrasian equilibrium. 26 The First and Second Welfare Theorems are the fundamental theorems of Welfare Economics. The first theorem states that any competitive equilibrium, or Walrasian equilibrium, leads to a Pareto efficient allocation of resources. The second theorem states the converse, that any efficient allocation can be sustainable by a competitive equilibrium. 193 Chapter 4 ■ Complexity Economics: A New Way to Witness Capitalism In the neoclassical economy agents are said to have perfect information and can cheaply decide what is the best (i.e.: rational) decision.

Social Capital and Civil Society by Francis Fukuyama

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Berlin Wall, blue-collar work, Fall of the Berlin Wall, feminist movement, Francis Fukuyama: the end of history, George Akerlof, German hyperinflation, Jane Jacobs, Joseph Schumpeter, Kevin Kelly, labor-force participation, low skilled workers, p-value, Pareto efficiency, postindustrial economy, principal–agent problem, RAND corporation, Silicon Valley, The Death and Life of Great American Cities, transaction costs, World Values Survey

The very origins of life are seen to be the result of this kind of process, where the random combinations of various proteins in a primordial soup suddenly produced higher-order, self-replicating molecules. Studies in complex adaptive systems have led to formal models and attempts to apply the theory beyond its origins in biology to social and economic systems. A market, for example, can be described as a complex adaptive system in which individual agents collectively achieve Pareto-optimal resource allocation through the pursuit of their own narrow maximizing strategies. Social good is not deliberately sought by anyone and yet arises spontaneously out of activities on the part of individual agents at a lower level of organization. 3 . Exogenous construction. By exogenous construction, I mean that the norms originate somewhere else than in the community in which they come to be applied, or else through the interaction of that community with its external environment.


pages: 306 words: 85,836

When to Rob a Bank: ...And 131 More Warped Suggestions and Well-Intended Rants by Steven D. Levitt, Stephen J. Dubner

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Affordable Care Act / Obamacare, Airbus A320, airport security, augmented reality, barriers to entry, Bernie Madoff, Black Swan, Broken windows theory, Captain Sullenberger Hudson, creative destruction, Daniel Kahneman / Amos Tversky, deliberate practice, feminist movement, food miles, George Akerlof, information asymmetry, invisible hand, loss aversion, mental accounting, Netflix Prize, obamacare, oil shale / tar sands, Pareto efficiency, peak oil, pre–internet, price anchoring, price discrimination, principal–agent problem, profit maximization, Richard Thaler, security theater, Ted Kaczynski, the built environment, The Chicago School, the High Line, Thorstein Veblen, transaction costs, US Airways Flight 1549

One hundred votes would cost you $10,000. So eventually, no matter how much you like a candidate, you choose to vote a finite number of times. What is so special about this voting scheme? People end up voting in proportion to how much they care about the election outcome. The system captures not just which candidate you prefer, but how strong your preferences are. Given Glen’s assumptions, this turns out to be Pareto efficient—i.e., no person in society can be made better off without making someone else worse off. The first criticism you’ll likely make against this sort of scheme is that it favors the rich. At one level that is true relative to our current system. It might not be a popular argument, but one thing an economist might say is that the rich consume more of everything—why shouldn’t they consume more political influence?

.), 26–29 National Highway Traffic Safety Administration (NHTSA), 249–50 National Violent Death Reporting System, 250 natural field experiment, 322 Neckermann, Susanne, 338 negative externality, 87 Newark-Liberty airport, 21–22 New York state senate, 233–36 New York Times, The, 3, 8, 11, 41, 96, 109–16, 167, 276 Nielsen ratings, TV viewing, 322–24 “No Gas Day,” 311–14 Noll, Chuck, 218 Noll, Thomas, 228–29 Nostradamus, 109 Obama, Barack, 33, 214, 278–80 obesity, 116–19 oil, “peak,” 109–16 Oliver, Eric, 118 online dating, 268–69 OPEC, 111–12 Oportunidades, 138–39 opportunity cost, 349–50 orange juice, 174–75 Osgood, Daniel, 165 packaging, 175–78 Pacquiao, Manny, 72–3 Pakistan earthquake, 325–27 panhandlers, 328–37 Pape, Robert, 10 paper vs. plastic bags, 167 Pardo, Bruce, 130–32 Pareto efficiency, 30 Pariah (TV show), 253–55 Parker, Susan W., 138–40 Pataki, George, 119 Paulos, John Allen, 286 Paulson, Henry, 236 Peltzman, Sam, 166 penny, 61–65 penny floor, 65 Pepsico, 59–60 perfect substitutes, 60 petroleum extraction, 109–16 Pettitte, Andy, 149–50 Pham, David “the Dragon,” 193 pilots, 83–86 pirates, 314–19 Pittsburgh Steelers, 212–19 Plack, Les, 47 Planned Parenthood, 65–67 Pledge-a-Picket, 66 poker: cheating, 154–58 how not to cheat, 153–55 Internet, 127–30, 157 one card away from final table, 192–95 record that can never be broken, 192 shootout tournament, 193 World Series of Poker, 187–88, 192–95 Polamalu, Troy, 216 Poland Spring bottled water, 3–4 Pollan, Michael, 169 postage, exemption from, 141–43 practice, ten thousand hours, 199, 201–2 praise, 351 Pre-Implantation Genetic Diagnosis (PGD), 280–82 prices: anchoring, 309 of autographed baseballs, 80–81 bounty on bin Laden, 57–59 of cars, 54–57 of chicken wings, 75–77 and corporate sponsorships, 81 discrimination in, 173 of food, 116 of gas, 86–90 for hate mail, 49–51 housing, 67–69 of kiwifruits, 77–80 peak oil, 109–16 of a penny, 61–65 of prescription drugs, 52–54 rising, 110, 111 of shrimp, 344 of songs, 69–71 and substitutes, 113 supply and demand, 78–80, 110, 112, 115, 128, 341–44 of voices in animated films, 306 priming, 228–29 principal-agent problem, 209 Prius Effect, 185 procrastination, 121 profits, going green for, 172–74 pro-life movement, 65 prostitution: Berlin brothel, 173 escort service, 261–67 legalization of, 255–56, 265–67 race: in the marketplace, 315–22 TV viewing habits, 322–24 rain forest, saving, 174–75 randomization, 322 rational addictions, 92–94 Reeve, Christopher, 102 Reilly, Barry, 225–26 Rickman, Neil, 225–26 RICO (federal racketeering statutes), 232 Rios, Brandon, 72 risk-aversion, 125–27 risk-taking, 121 Rochambeau (Rock, Paper, Scissors), 188–89 Rodriguez, Alex, 149 Roethlisberger, Ben, 103 Roe v.


pages: 137 words: 36,231

Information: A Very Short Introduction by Luciano Floridi

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agricultural Revolution, Albert Einstein, bioinformatics, carbon footprint, Claude Shannon: information theory, conceptual framework, double helix, Douglas Engelbart, Douglas Engelbart, George Akerlof, Gordon Gekko, industrial robot, information asymmetry, intangible asset, Internet of things, invention of writing, John Nash: game theory, John von Neumann, moral hazard, Nash equilibrium, Norbert Wiener, Pareto efficiency, phenotype, Pierre-Simon Laplace, prisoner's dilemma, RAND corporation, RFID, Thomas Bayes, Turing machine, Vilfredo Pareto

This may seem strange but, no matter what the other prisoner decides to do, each of them always gains a greater payoff by defecting. Since cooperating is strictly dominated by defecting, that is, since in any situation defecting is more beneficial than cooperating, defecting is the rational decision to take (Table 7). This sort of equilibrium qualifies as a Pareto-suboptimal solution (named after the economist Vilfredo Pareto, 1848-1923) because there could be a feasible change (known as Pareto improvement) to a situation in which no player would be worse off and at least one player would be better off. Unlike the other three outcomes, the case in which both prisoners defect can also be described as a Nash equilibrium: it is the only outcome in which each player is doing the best he can, given the available information about the other player's actions. Nash equilibria are crucial features in game theory, as they represent situations in which no player's position can be improved by selecting any other available strategy while all the other players are also playing their best option and not changing their strategies.


pages: 662 words: 180,546

Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown by Philip Mirowski

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Alvin Roth, Andrei Shleifer, asset-backed security, bank run, barriers to entry, Basel III, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, blue-collar work, Bretton Woods, Brownian motion, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, constrained optimization, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, dark matter, David Brooks, David Graeber, debt deflation, deindustrialization, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, facts on the ground, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, full employment, George Akerlof, Goldman Sachs: Vampire Squid, Hernando de Soto, housing crisis, Hyman Minsky, illegal immigration, income inequality, incomplete markets, information asymmetry, invisible hand, Jean Tirole, joint-stock company, Kenneth Arrow, Kenneth Rogoff, knowledge economy, l'esprit de l'escalier, labor-force participation, liberal capitalism, liquidity trap, loose coupling, manufacturing employment, market clearing, market design, market fundamentalism, Martin Wolf, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Nash equilibrium, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, oil shock, Pareto efficiency, Paul Samuelson, payday loans, Philip Mirowski, Ponzi scheme, precariat, prediction markets, price mechanism, profit motive, quantitative easing, race to the bottom, random walk, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, school choice, sealed-bid auction, Silicon Valley, South Sea Bubble, Steven Levy, technoutopianism, The Chicago School, The Great Moderation, the map is not the territory, The Myth of the Rational Market, the scientific method, The Wisdom of Crowds, theory of mind, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Vilfredo Pareto, War on Poverty, Washington Consensus, We are the 99%, working poor

More tellingly, he admits that the mere fact that prices for the “same” goods might be set in structurally different market formats would by itself account for destabilizing price dynamics; but passes over in silence the fact that this would delegitimize the entire neoclassical approach to pricing and risk, including his own work.78 And worse, the “market failure” that he repeatedly diagnoses has nothing to do with what people mean by “failure” in the vernacular. Stiglitz (and Krugman and Solow and other guest stars in the New York Review of Books) identify “market failure” with not realizing the full measure of utility that might have occurred in the standard neoclassical model—this is called Pareto optimality in the trade—and exists in an imaginary universe utterly devoid of markets freezing up and the implosion of the assignment of credible prices across the board. Likewise, the Stiglitz-Greenwald paper has nothing whatsoever to do with the collapse of the financial sector in 2008. Using their own words, “we showed that there were essentially always simple government interventions that could make some individuals better off without making anyone worse off.

The intuition behind our result was that whenever information was imperfect, actions generated externality-like effects.”79 Stiglitz persistently conflates “welfare loss” with system-wide economic failure and market breakdown: this travesty stands in stark contrast to the model-free occasions wherein Stiglitz perceptively analyzes the inconsistencies of concrete practices in real world institutions, linking them to palpable dire outcomes. Pareto optimality was the last thing one needed to consult in trying to understand the utter confusion and disarray accompanying the mad improvisations at the Fed and the congressional TARP appropriation in the depths of the crisis; it certainly would be impotent to clarify the types of “government intervention” required to stem the collapse. Incredibly, the Greenwald-Stiglitz model doesn’t even explicitly have any money in it, even though one core phenomenon of the 2008 meltdown was a financial credit crisis.

., chapter 5; Moreton, To Serve God and Wal-Mart, p. 94. 41 Some of the better ethnographies exploring these issues are Turkle, Life on the Screen and Alone Together; Gershon, “Un-friend My Heart.” 42 Gershon, “Un-friend My Heart.” 43 Turkle, Alone Together, p. 273. 44 Frank, One Market Under God, p. 244. 45 Bowmaker, Economics Uncut; Lipman, “Why Is Language Vague?” 46 This argument is made with great perspicuity by John Davis in his The Theory of the Individual in Economics and Individuals and Identity in Economics. 47 It seems to have escaped most economists that these resorts to tautology in economic theory have leached the Prime Imperative of Pareto Optimality of any meaning whatsoever. In any event, the supposedly fixed repertoire of roles and types to be emulated by the agent has also been eroded by the neoliberal ascendancy. This is yet another example of the Zombie Neoclassical Economist lurching aimlessly across the landscape. 48 Davis, Individuals and Identity in Economics; Mirowski, Machine Dreams, pp. 443–52. 49 There are a fair number of books written by MPS members denying any salience to class.

Commodity Trading Advisors: Risk, Performance Analysis, and Selection by Greg N. Gregoriou, Vassilios Karavas, François-Serge Lhabitant, Fabrice Douglas Rouah

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Asian financial crisis, asset allocation, backtesting, capital asset pricing model, collateralized debt obligation, commodity trading advisor, compound rate of return, constrained optimization, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, discrete time, distributed generation, diversification, diversified portfolio, dividend-yielding stocks, fixed income, high net worth, implied volatility, index arbitrage, index fund, interest rate swap, iterative process, linear programming, London Interbank Offered Rate, Long Term Capital Management, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, p-value, Pareto efficiency, Ponzi scheme, quantitative trading / quantitative finance, random walk, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, stochastic process, survivorship bias, systematic trading, technology bubble, transaction costs, value at risk, zero-sum game

In the next section we discuss the different DEA methodologies. Then we describe the data, discuss the empirical results, and summarize our conclusions. METHODOLOGY In its most rudimentary form, DEA calculates an efficiency score that describes the relative efficiency of a CTA when compared to other CTAs in the sample. The first step in DEA is to obtain an efficient frontier from the inputs and outputs identified by Pareto optimality.2 DEA then calculates the efficiency score of each DMU relative to the efficiency frontier. In this chapter, the DMUs are CTAs. The efficiency frontier consists of the “best-performing” CTAs—the most efficient at transforming the inputs into outputs (Charnes, Cooper, and Rhodes, 1981). Any CTA not on the frontier would have an efficiency score less than 100 and would be labeled inefficient.

How the inputs and outputs are used in the efficiency analysis are essential because they establish the grounds on which the efficiency of the fund is calculated. The most extensively used DEA technique to measure efficiency takes the weighted sum of outputs and divides it by the weighted sum of inputs (Golany and Roll, 1994). In its simplest form, DEA calculates weights from a linear program that maximizes relative efficiency with a set 2Pareto optimality means the best that can be attained without putting any group at a disadvantage. In other words, a group of funds becomes better off if an individual fund becomes better off and none becomes worse off. Simple and Cross-Efficiency of CTAs Using Data Envelopment Analysis 133 of minimal weight constraints.3 Charnes, Cooper, and Rhodes (1978) proposed reducing the multiple-input, multiple-output model to a ratio with a single virtual input and a single virtual output.


pages: 167 words: 50,652

Alternatives to Capitalism by Robin Hahnel, Erik Olin Wright

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3D printing, affirmative action, basic income, crowdsourcing, inventory management, iterative process, Kickstarter, loose coupling, means of production, Pareto efficiency, profit maximization, race to the bottom, transaction costs

The Dispassionate Case Against Markets Efficiency: It is well known among professional economists that markets allocate resources inefficiently when they are out of equilibrium, when they are non-competitive, and when there are external effects. When the fundamental theorem of welfare economics is read critically, it says as much: Only if there are no external effects, only if all markets are competitive, and only when all markets are in equilibrium is it true that a market economy will yield a Pareto optimal outcome. But despite these clear warnings, market enthusiasts insist that if left alone markets generally allocate resources very efficiently. This can only be true if: (1) disequilibrating forces are weak, (2) noncompetitive market structures are uncommon, and (3) externalities are the exception, rather than the rule. There are good theoretical and empirical reasons to believe exactly the opposite in all three cases.


Governing the Commons: The Evolution of Institutions for Collective Action by Elinor Ostrom

agricultural Revolution, clean water, Gödel, Escher, Bach, land tenure, Pareto efficiency, principal–agent problem, prisoner's dilemma, profit maximization, RAND corporation, The Death and Life of Great American Cities, The Nature of the Firm, transaction costs

., 218n4 opportunism, 36 243n7 209, 242n5 optimality, 223-4n1 Orange County, California, 110, 230n4, 236n40 see also California groundwater basins Orange County Water District, 230n4 Orihuela, Spain huerta of, 76-8, 80-2, 92, 180,205 see also Spanish huertas Orr, D. S., 218n3 Ostrom, E., 47, 50-1, 54-5, 104, 112, 139-40, 220n20,n1, 221n4,222-3n25,231-2n15, 235n30, 236n41, 237n50,n52, 244n20 Ostrom, v., 31, 55, 221n4, 222n15, 244n21 outcome Pareto-inferior, 5 Pareto-optimal,S patterns of, 23 Palos Verdes Peninsula, California, 114 Palos Verdes Water Company, 116-17 Panayoutou, T., 23 Parker, D. E., 228n27 Pasadena, California, 111-14, 116, 124, 230n6,232n18 see also California groundwater basins Peregrin, D., 225nl0 Perera, J., 167, 170-1 Philip II of Spain, 81, 227n21 Philippine Water Code, 85 Philippine zanjeras, 59-61, 82-9, 102, 194-5, 228n27,n29,n31, 228-9n32,241n26 Phyne, J., 205, 218n6, 241n27 Picardi, A.


India's Long Road by Vijay Joshi

Affordable Care Act / Obamacare, barriers to entry, Basel III, basic income, blue-collar work, Bretton Woods, business climate, capital controls, central bank independence, clean water, collapse of Lehman Brothers, collective bargaining, colonial rule, congestion charging, corporate governance, creative destruction, crony capitalism, decarbonisation, deindustrialization, demographic dividend, demographic transition, Doha Development Round, eurozone crisis, facts on the ground, failed state, financial intermediation, financial repression, first-past-the-post, floating exchange rates, full employment, germ theory of disease, Gini coefficient, global supply chain, global value chain, hiring and firing, income inequality, Indoor air pollution, Induced demand, inflation targeting, invisible hand, land reform, Mahatma Gandhi, manufacturing employment, Martin Wolf, means of production, microcredit, moral hazard, obamacare, Pareto efficiency, price mechanism, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, quantitative easing, race to the bottom, randomized controlled trial, rent-seeking, reserve currency, rising living standards, school choice, school vouchers, secular stagnation, Silicon Valley, smart cities, South China Sea, special drawing rights, The Future of Employment, The Market for Lemons, too big to fail, total factor productivity, trade liberalization, transaction costs, universal basic income, urban sprawl, working-age population

The implication is that markets can be expected to function well only in an economy that is largely under private ownership. Of course, ‘largely’ does not mean ‘exclusively’ or even ‘predominantly’. There can be more or less state ownership of the means of production in an economy that is largely privately owned. Note that a quite separate argument for private property is its connection with individual freedom. 6. This outcome is called ‘Pareto efficiency’ in the jargon of economics. Pareto efficiency is ensured by the ‘invisible hand’ of competition, if there are no ‘market failures’. 7. See Hayek (1940, 1945). Though better than central planning, the coordinating mechanism of the market is by no means perfect (see below). 8. Moreover, even if planning could somehow mimic a market system, the incentives of managers would not be such as to evoke efficient responses from them (see n. 5 above). 9.


pages: 411 words: 108,119

The Irrational Economist: Making Decisions in a Dangerous World by Erwann Michel-Kerjan, Paul Slovic

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Andrei Shleifer, availability heuristic, bank run, Black Swan, Cass Sunstein, clean water, cognitive dissonance, collateralized debt obligation, complexity theory, conceptual framework, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-subsidies, Daniel Kahneman / Amos Tversky, endowment effect, experimental economics, financial innovation, Fractional reserve banking, George Akerlof, hindsight bias, incomplete markets, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, iterative process, Kenneth Arrow, Loma Prieta earthquake, London Interbank Offered Rate, market bubble, market clearing, money market fund, moral hazard, mortgage debt, Pareto efficiency, Paul Samuelson, placebo effect, price discrimination, price stability, RAND corporation, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, source of truth, statistical model, stochastic process, The Wealth of Nations by Adam Smith, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, ultimatum game, University of East Anglia, urban planning, Vilfredo Pareto

What if we had an institution in Crete, Cyprus, or Malta, where researchers from the Middle East could come together to think inventively about how they might collaborate and cooperate to overcome certain problems? Today’s resolutions of international disputes will determine how and when future problems will be negotiated. The lure of potential joint gains from future negotiations should be reflected in the Pareto frontiers of the negotiation problems of today. If some countries are having difficulties resolving their current differences, perhaps they should speculate about the gains coming from future negotiations, if only today’s disputes could be collaboratively resolved. So much in the world needs fixing that it is incumbent on today’s negotiators to keep in mind that present negotiators are often the gatekeepers for later collaborative negotiations.


pages: 241 words: 75,516

The Paradox of Choice: Why More Is Less by Barry Schwartz

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accounting loophole / creative accounting, attribution theory, Atul Gawande, availability heuristic, Cass Sunstein, Daniel Kahneman / Amos Tversky, endowment effect, framing effect, income per capita, job satisfaction, loss aversion, medical residency, mental accounting, Own Your Own Home, Pareto efficiency, positional goods, price anchoring, psychological pricing, RAND corporation, Richard Thaler, science of happiness, The Wealth of Nations by Adam Smith

You may not always be conscious of this, but your effort to get the best car will interfere with your desire to be a good friend. Your effort to get the best job will intrude on your duty to be the best parent. And so, if the time you save by following some of my suggestions is redirected to the improvement of your relationships with other people in your life, you will not only make your life happier, you will improve theirs. It’s what economists call “Pareto efficient,” a change that benefits everybody. “You may not always be conscious of this, but your effort to get the best car will interfere with your desire to be a good friend.” Read on Further Reading THE PARADOX OF CHOICE is hardly the last word on the topic of choice and its relation to freedom, autonomy, and well-being. Indeed, in some respects it is the “first word,” and I hope others will scrutinize and evaluate the effects that continued increases in choice have on well-being and on freedom in greater detail than I have been able to do in my book.


pages: 261 words: 103,244

Economists and the Powerful by Norbert Haring, Norbert H. Ring, Niall Douglas

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accounting loophole / creative accounting, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bernie Madoff, British Empire, central bank independence, collective bargaining, commodity trading advisor, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, information asymmetry, Jean Tirole, job satisfaction, Joseph Schumpeter, Kenneth Arrow, knowledge worker, labour market flexibility, law of one price, light touch regulation, Long Term Capital Management, low skilled workers, mandatory minimum, market bubble, market clearing, market fundamentalism, means of production, minimum wage unemployment, moral hazard, new economy, obamacare, old-boy network, open economy, Pareto efficiency, Paul Samuelson, pension reform, Ponzi scheme, price stability, principal–agent problem, profit maximization, purchasing power parity, Renaissance Technologies, rolodex, Sergey Aleynikov, shareholder value, short selling, Steve Jobs, The Chicago School, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, ultimatum game, union organizing, Vilfredo Pareto, working-age population, World Values Survey

“Returns to Shareholder Activism: Evidence from a Clinical Study of the Hermes U.K. Focus Fund.” Review of Financial Studies 22: 3093–3129. Becker, Gary S. 1957/1971. The Economics of Discrimination. 2nd ed. Chicago: University of Chicago Press. . 1976. The Economic Approach to Human Behavior. Chicago: University of Chicago Press. Bellante, Don. 2004. “Edward Chamberlin: Monopolisitic Competition and Pareto Optimality.” Journal of Business and Economics Research 2: 17–28. Benabou, Roland and Jean Tirole. 2006. “Belief in a Just World and Redistributive Politics.” Quarterly Journal of Economics 121: 699–746. Benmelech, Efraim, Eugene Kandel and Pietro Veronesi. 2010. “Stock-Based Compensation and CEO (Dis)Incentives.” Quarterly Journal of Economics 125: 1769–1820. Benmelech, Efraim and Toby Moskowitz. Forthcoming.


pages: 298 words: 95,668

Milton Friedman: A Biography by Lanny Ebenstein

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affirmative action, banking crisis, Berlin Wall, Bretton Woods, Deng Xiaoping, Fall of the Berlin Wall, fiat currency, floating exchange rates, Francis Fukuyama: the end of history, full employment, Hernando de Soto, hiring and firing, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Arrow, labour market flexibility, Lao Tzu, liquidity trap, means of production, Mont Pelerin Society, Myron Scholes, Pareto efficiency, Paul Samuelson, Ponzi scheme, price stability, rent control, road to serfdom, Robert Bork, Ronald Coase, Ronald Reagan, school choice, school vouchers, secular stagnation, Simon Kuznets, stem cell, The Chicago School, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Thorstein Veblen, zero-sum game

[I]f he winds up talking with someone he thinks is worthwhile he has immense patience, and a willingness to engage and argue. Milton is a great arguer, and we used to say that everyone loved to argue with Milton—when he wasn’t there!”38 Ronald Coase was among the leading economists of the twentieth century, and his influence continues to grow. His best-known contribution is the Coase theorem, essentially the idea that freedom of exchange is the ultimate requirement to reach Pareto optimality, whereby no exchange will increase any party’s welfare. In particular, the initial allocation of legal rights will not affect ultimate economic outcome as long as freedom of exchange is uninhibited. Friedman and Coase have had good relations over the years, although they have never been especially close personally or professionally. Coase went to Chicago in 1964 and received the Nobel Prize in Economics in 1991.


pages: 518 words: 107,836

How Not to Network a Nation: The Uneasy History of the Soviet Internet (Information Policy) by Benjamin Peters

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Albert Einstein, Andrei Shleifer, Benoit Mandelbrot, bitcoin, Brownian motion, Claude Shannon: information theory, cloud computing, cognitive dissonance, computer age, conceptual framework, continuation of politics by other means, crony capitalism, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Graeber, Dissolution of the Soviet Union, Donald Davies, double helix, Drosophila, Francis Fukuyama: the end of history, From Mathematics to the Technologies of Life and Death, hive mind, index card, informal economy, information asymmetry, invisible hand, Jacquard loom, Jacquard loom, John von Neumann, Kevin Kelly, knowledge economy, knowledge worker, linear programming, mandelbrot fractal, Marshall McLuhan, means of production, Menlo Park, Mikhail Gorbachev, mutually assured destruction, Network effects, Norbert Wiener, packet switching, Pareto efficiency, pattern recognition, Paul Erdős, Peter Thiel, Philip Mirowski, RAND corporation, rent-seeking, road to serfdom, Ronald Coase, scientific mainstream, Steve Jobs, Stewart Brand, stochastic process, technoutopianism, The Structural Transformation of the Public Sphere, transaction costs, Turing machine

Etymologically, the English market is by far the newcomer of the two and can be traced back to the mid-thirteenth-century Italian term for a “public building or space for trading, buying, and selling.” The term market economy is first noted in English only in 1948, centuries after the early modern capitalist revolution that gave it fame and that has since enjoyed a privileged if often misunderstood position in the Western vocabulary of modern politics, economics, and society. One reason for justifying the Pareto efficiency of the market rests on the transitivity of human preferences. For the market to be the ideal organizational mode, some economists assume that rational actors will rank the order of their preferences linearly: if rational actors prefer option A over B as well as option B over C, they also will prefer option A over C. Yet this view of the market has been challenged in recent decades. Markets hide transaction costs and information asymmetries.


pages: 523 words: 111,615

The Economics of Enough: How to Run the Economy as if the Future Matters by Diane Coyle

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accounting loophole / creative accounting, affirmative action, bank run, banking crisis, Berlin Wall, bonus culture, Branko Milanovic, BRICs, call centre, Cass Sunstein, central bank independence, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation does not imply causation, Credit Default Swap, deindustrialization, demographic transition, Diane Coyle, disintermediation, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Financial Instability Hypothesis, Francis Fukuyama: the end of history, George Akerlof, Gini coefficient, global supply chain, Gordon Gekko, greed is good, happiness index / gross national happiness, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, illegal immigration, income inequality, income per capita, industrial cluster, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jane Jacobs, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour market flexibility, light touch regulation, low skilled workers, market bubble, market design, market fundamentalism, megacity, Network effects, new economy, night-watchman state, Northern Rock, oil shock, Pareto efficiency, principal–agent problem, profit motive, purchasing power parity, railway mania, rising living standards, Ronald Reagan, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, South Sea Bubble, Steven Pinker, The Design of Experiments, The Fortune at the Bottom of the Pyramid, The Market for Lemons, The Myth of the Rational Market, The Spirit Level, transaction costs, transfer pricing, tulip mania, ultimatum game, University of East Anglia, web application, web of trust, winner-take-all economy, World Values Survey, zero-sum game

Instead, I want to describe more carefully what it means to improve social welfare, where the standard approach of welfare economics has a lot to offer. Because, as argued earlier, neither happiness alone nor GDP alone is enough to define social welfare. Economists typically use what is on the face of it a limited definition of welfare. A policy or change improves welfare if it improves the potential welfare of one person without diminishing that of anybody else—this is known in the jargon as a Pareto improvement. But although this seems oddly limited, what it means in practice is that economics defines welfare in terms of increasing people’s range of choices. A welfare improvement is something that expands the options of one person while reducing no others. This approach also makes it very clear that while there is no inherent conflict between wealth and happiness, welfare is inextricably tied to free choice.


pages: 538 words: 121,670

Republic, Lost: How Money Corrupts Congress--And a Plan to Stop It by Lawrence Lessig

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asset-backed security, banking crisis, carried interest, circulation of elites, cognitive dissonance, corporate personhood, correlation does not imply causation, crony capitalism, David Brooks, Edward Glaeser, Filter Bubble, financial deregulation, financial innovation, financial intermediation, invisible hand, jimmy wales, Martin Wolf, meta analysis, meta-analysis, Mikhail Gorbachev, moral hazard, Pareto efficiency, place-making, profit maximization, Ralph Nader, regulatory arbitrage, rent-seeking, Ronald Reagan, Silicon Valley, single-payer health, The Wealth of Nations by Adam Smith, too big to fail, upwardly mobile, WikiLeaks, Zipcar

Law Review 84 (1996): 1; Daniel Hays Lowenstein, “On Campaign Finance Reform: The Root of All Evil Is Deeply Rooted,” Hofstra Law Review 18 (1989): 301; Fred Wertheimer and Susan Weiss Manes, “Campaign Finance Reform: A Key to Restoring the Health of Our Democracy,” Columbia Law Review 94 (1994): 1126; Andrea Prat, “Campaign Spending with Office-Seeking Politicians, Rational Voters, and Multiple Lobbies,” Journal of Economic Theory 103 (Mar. 2002): 162; Stephen Coate, “Pareto-Improving Campaign Finance Policy,” American Economic Review 94 (June 2004): 628; Lillian R. BeVier, “Campaign Finance Reform: Specious Arguments, Intractable Dilemmas,” Columbia Law Review 94 (1994): 1258; Bradley A. Smith, “Money Talks: Speech, Corruption, Equality, and Campaign Finance,” Georgetown Law Journal 86 (1997): 45; Daniel R. Ortiz, “The Democratic Paradox of Campaign Finance Reform,” Stanford Law Review 50 (1997): 893; Kathleen M.


pages: 514 words: 152,903

The Best Business Writing 2013 by Dean Starkman

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Asperger Syndrome, bank run, Basel III, call centre, clean water, cloud computing, collateralized debt obligation, Columbine, computer vision, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, Erik Brynjolfsson, eurozone crisis, Exxon Valdez, factory automation, fixed income, full employment, Goldman Sachs: Vampire Squid, hiring and firing, hydraulic fracturing, income inequality, jimmy wales, job automation, John Markoff, late fees, London Whale, low skilled workers, Mahatma Gandhi, market clearing, Maui Hawaii, Menlo Park, Occupy movement, oil shale / tar sands, Parag Khanna, Pareto efficiency, price stability, Ray Kurzweil, Silicon Valley, Skype, sovereign wealth fund, stakhanovite, Steve Jobs, Stuxnet, the payments system, too big to fail, Vanguard fund, wage slave, Y2K, zero-sum game

From the perspective of those near the top of the pecking order, it is better and it is fairer that potential abundance be withheld than that old claims be destroyed or devalued. Even schemes that preserve the wealth ordering (like Steve Keen’s “modern jubilee”) are unfair, because they would collapse the relative distance between competitors and devalue the insurance embedded in some people’s lead over others. The zero-sum, positional nature of wealth-as-insurance is one of many reasons why there is no such thing as a “Pareto improvement.” Macroeconomic interventions that would increase real output while condensing wealth dispersion undo the hard-won, “hard-earned” insurance advantage of the wealthy. As polities, we have to trade off extra consumption by the poor against a loss of insurance for the rich. There are costs and benefits, winners and losers. We face trade-offs between unequal distribution and full employment. If we want to maximize total output, we have to compress the wealth distribution.


pages: 685 words: 203,949

The Organized Mind: Thinking Straight in the Age of Information Overload by Daniel J. Levitin

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airport security, Albert Einstein, Amazon Mechanical Turk, Anton Chekhov, Bayesian statistics, big-box store, business process, call centre, Claude Shannon: information theory, cloud computing, cognitive bias, complexity theory, computer vision, conceptual framework, correlation does not imply causation, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, delayed gratification, Donald Trump, en.wikipedia.org, epigenetics, Eratosthenes, Exxon Valdez, framing effect, friendly fire, fundamental attribution error, Golden Gate Park, Google Glasses, haute cuisine, impulse control, index card, indoor plumbing, information retrieval, invention of writing, iterative process, jimmy wales, job satisfaction, Kickstarter, life extension, meta analysis, meta-analysis, more computing power than Apollo, Network effects, new economy, Nicholas Carr, optical character recognition, Pareto efficiency, pattern recognition, phenotype, placebo effect, pre–internet, profit motive, randomized controlled trial, Rubik’s Cube, Skype, Snapchat, statistical model, Steve Jobs, supply-chain management, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Bayes, Turing test, ultimatum game, zero-sum game

See brain physiology news media, 338–40 Newton, Isaac, 162 New Yorker, 120, 336 New York Times, 6, 339, 365 Nietzsche, Friedrich, 375 Nixon, Richard, 201 NMDA receptor, 167 nonlinear thinking and perception, 38, 215, 217–18, 262, 380 Norman, Don, 35 number needed to treat metric, 236, 240, 247, 264, 264 Obama, Barack, 219, 303 object permanence, 24 Office of Presidential Correspondence, 303 Olds, James, 101 Old Testament, 151 O’Neal, Shaquille, 352–53 One Hundred Names for Love (Ackerman), 364–65 online dating, 130–34, 422n130, 423n132 optical character recognition (OCR), 93, 119, 119 optimal information, 308–10 orders of magnitude, 354–55, 358–59, 361, 363, 400n7 organizational structure, 271–76, 315–18, 470n315, 471n317 Otellini, Paul, 380–81 Overbye, Dennis, 6, 19 Oxford English Dictionary, 114 Oxford Filing Supply Company, 93–94 Page, Jimmy, 174 pair-bonding, 128, 142 paperwork, 293–306 Pareto optimality, 269 parking tickets, 237, 451n237 Parkinson’s disease, 167–68 passwords, xx, 103–5 Patel, Shreena, 258 paternalism, medical, 245, 257 pattern recognition, 28, 249 Patton, George S., 73–74 peak performance, 167, 189, 191–92, 203, 206 Peer Instruction (Mazur), 367 perfectionism, 174, 199–200 periodic table of elements, 372–73, 373, 480n372 Perry, Bruce, 56 Peterson, Jennifer, 368 pharmaceuticals, 256–57, 343, 345–46 Picasso, Pablo, 283 Pierce, John R., 73 Pirsig, Robert, 69–73, 89, 295–97, 300 placebo effect, 253, 255 place memory, 82–83, 106, 293–94 planning, 43, 161, 174–75, 319–26 Plato, 14, 58, 65–66 plausibility, 350, 352, 478n352 Plimpton, George, 200 Plutarch, 340 Poldrack, Russ, 97 Polya, George, 357 Ponzo illusion, 21, 22 positron emission tomography (PET), 40 prediction, 344–45 prefrontal cortex, 161 Area 47, 287 and attention, 16–17, 43, 45–46 and changing behaviors, 176 and children’s television, 368 and creative time, 202, 210 and decision-making, 277, 282 and flow state, 203, 207 and information overload, 8 and literary fiction, 367 and manager/worker distinction, 176 and multitasking, 96, 98, 307 and procrastination, 197, 198, 200–201 and sleep, 187 and task switching, 171–72 and time organization, 161, 165–66, 174, 180 See also brain physiology preselection effect, 331, 343 Presidential Committee on Information Literacy, 365 primacy effect, 55, 408n56 primates, 17–18, 125–26, 135 Prince, 174 Princeton Theological Seminary, 145–46 prior distributions, 249 prioritization, 5–7, 33–35, 379–80 probability.


pages: 823 words: 220,581

Debunking Economics - Revised, Expanded and Integrated Edition: The Naked Emperor Dethroned? by Steve Keen

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accounting loophole / creative accounting, banking crisis, banks create money, barriers to entry, Benoit Mandelbrot, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, butterfly effect, capital asset pricing model, cellular automata, central bank independence, citizen journalism, clockwork universe, collective bargaining, complexity theory, correlation coefficient, creative destruction, credit crunch, David Ricardo: comparative advantage, debt deflation, diversification, double entry bookkeeping, en.wikipedia.org, Eugene Fama: efficient market hypothesis, experimental subject, Financial Instability Hypothesis, fixed income, Fractional reserve banking, full employment, Henri Poincaré, housing crisis, Hyman Minsky, income inequality, information asymmetry, invisible hand, iterative process, John von Neumann, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market microstructure, means of production, minimum wage unemployment, money market fund, open economy, Pareto efficiency, Paul Samuelson, place-making, Ponzi scheme, profit maximization, quantitative easing, RAND corporation, random walk, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Coase, Schrödinger's Cat, scientific mainstream, seigniorage, six sigma, South Sea Bubble, stochastic process, The Great Moderation, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, total factor productivity, tulip mania, wage slave, zero-sum game

I will leave exploration of these newer strands to the interested reader to pursue. 5 This reference to physics is now seriously dated, since this empirical observation has now been corroborated – see the Wikipedia item on the ‘Accelerating Universe’ for a brief discussion. 6 Ironically, Austrian economics, an alternative school of thought that is very closely related to neoclassical economics, differs by singing the praises of capitalism as a disequilibrium system (see Chapter 18). 7 Equilibrium in turn has been endowed with essential welfare properties, with a ‘Pareto optimal equilibrium’ being a situation in which no one can be made any better off without making someone else worse off. Chapter 9 1 If you have ever taught a child to ride a bike, you would know that this lesson is the most difficult one to grasp – that a moving bike balances itself, without the need for training wheels or other props which would keep it upright when it was stationary. 2 This analogy is apt in more ways than one.