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Bad money drives out good. One of the oldest laws in economics, named after Sir Thomas Gresham, an adviser to Queen Elizabeth I of England. He observed that when a currency has been debased and a new one is introduced to replace it, the new one will be hoarded and effectively taken out of circulation, while the old one will continue to be used for transactions, to be got rid of as fast as possible.
Industry:Economy
Spending by national and local government and some government-backed institutions. See fiscal policy, golden rule and budget.
Industry:Economy
There are few more hotly debated topics in economics than what role the state should play in the economy. Plenty of economists provided intellectual support for state intervention during the era of big government, particularly from the 1930s to the 1980s. Keynesians argued that the state should manage the amount of demand in the economy to maintain full employment. Others advocated a command economy, in which the government would decide price levels, oversee the allocation of scarce resources and run the most important parts of the economy (the "commanding heights") or, in communist countries, the entire economy. The role of the state increased at the expense of market forces. Economists provided plenty of examples of market failure that seemed to justify this. Since the 1950s, there has been growing evidence that government intervention can also be flawed, and can often impose even greater costs on an economy than market failure. One reason is that when a government acts, it usually does so as a monopoly, with all the attendant economic inefficiencies this implies. In practice, policies of Keynesian demand management often resulted in inflation, and thus lost much of their credibility. There was growing concern that public investment was crowding out superior private investment, and that other public spending on things such as health care, education and pensions was similarly discouraging private provision. Government management of commercial enterprises was often seen to be inefficient and, starting in the 1980s, nationalization gave way to privatization. Even when the state was not directly responsible for economic activity, but instead set the rules governing private behavior, there was evidence of regulatory failure. High rates of taxation started to discourage people and companies from undertaking economic activities that would, without the tax, have been profitable; wealth creation suffered. Most economists agree that there is a need for some government role in the economy. A market economy can function only if there is an adequate legal system, and, in particular, clearly defined, enforceable property rights. The legal system is probably an example of what economists call a public good (although the existence in many countries and industries of some self-regulation shows it is not always so). Although politicians in many countries spent most of the period since 1980 talking about the need to reduce the role of the state in the economy, and in many cases introduced policies of privatization, deregulation and liberalization to help this happen, public spending has continued to increase as a share of GDP. Within the OECD, public spending accounted for a larger slice of GDP in 2002 than in 1990, which was in turn higher than in 1980. Indeed, it has risen during every decade since the start of the 20th century. One reason was that governments had to honor spending commitments on pensions and health care made by previous generations of politicians.
Industry:Economy
Over the economic cycle, a government should borrow only to invest and not to finance current spending. This rule is certainly a prudent approach to fiscal policy, provided that governments are honest in describing spending as investment, that they invest in appropriate things and do so efficiently, and that they are careful to avoid crowding out superior private investment. But there are other fiscal policy options that may make as much sense. See, for example, balanced budget.
Industry:Economy
A monetary system in which a country backs its currency with a reserve of gold, and allows currency holders to exchange their notes and coins for gold. For many years up to 1914, most of the world's leading currencies had their exchange rate determined by the gold standard. The economic disruption resulting from the first world war led the combatants to abandon the link to gold. The UK (with others) returned to the gold standard in 1925, before quitting it for good in 1931. The widespread use of the gold standard ended during 1930-33 as a result of global depression and large cuts in international lending. The United States left the gold standard in 1933 and partially returned to it in 1934. After the second world war, a limited form of gold standard continued but only directly applied to the dollar; other major currencies had their exchange rates fixed to the dollar under the Bretton Woods arrangements. The dollar was finally cut loose from the gold standard in 1971.
Industry:Economy
For much of human history gold has been an important ingredient of economic activity. But its importance declined during the 20th century and may continue to shrink in future. The gold standard, which fixed exchange rates to the value of gold during the 19th and early 20th centuries, has been long abandoned. Central banks, which in 2000 still owned 30,000 tones, over one-quarter of all the gold ever mined, no longer feel the need to have large reserves of the metal to support the value of their currency. It does not pay them any interest, though they may earn a little by lending it to bullion dealers. So they have started to sell. Governments and investors have traditionally held gold as a hedge against inflation and to provide security at times of international crisis. But its role as a store of value has been tarnished. During the 1980s and 1990s, the value of gold generally failed to keep pace with inflation. The liquidity of gold is also less than that of a foreign currency so it cannot as easily be used for foreign exchange intervention in defense of a currency under attack. In short, gold is no longer a monetary asset. It has become just another commodity, although so-called gold-bugs still believe that should inflation ever soar again, gold will once more become the thing to have.
Industry:Economy
A buzz word that refers to the trend for people, firms and governments around the world to become increasingly dependent on and integrated with each other. This can be a source of tremendous opportunity, as new markets, workers, business partners, goods and services and jobs become available, but also of competitive threat, which may undermine economic activities that were viable before globalization. The term first surfaced during the 1980s to characterize huge changes that were taking place in the international economy, notably the growth in international trade and in flows of capital around the world. Globalization has also been used to describe growing income inequality between the world's rich and poor; the growing power of multinational companies relative to national government; and the spread of capitalism into former communist countries. Usually, the term is synonymous with international integration, the spread of free markets and policies of liberalization and free trade. The process is not the result simply of economic forces. The decisions of policymakers have also played an important part, although not all governments have embraced the change warmly. The driving force of globalization has been multinational companies, which since the 1970s have constantly, and often successfully, lobbied governments to make it easier for them to put their skills and capital to work in previously protected national markets. Firms enjoying some national protection, and their (often unionized) workers, have been some of the main opponents of globalization, along with advocates of fair trade. Despite all the talk of globalization during the 1990s, in some respects the world economy was more integrated in the late 19th century. The labor market was certainly more global. For example, the flow of people out of Europe, 300,000 people a year in the mid-19th century, reached 1m a year after 1900. Now governments are much fussier about immigration, and people are no longer free to migrate as they wish. As for capital markets, only in the 1990s did international capital flows, relative to the size of the world economy, recover to the levels of the few decades before the first world war. This early globalized economy did not last for long, however. Between the two world wars, the flows of trade, capital and people collapsed to a trickle. Even before the first world war, governments started to put up the shutters against migrants and imports. Could such a backlash against globalization happen again?
Industry:Economy
Public goods that cannot be provided by one country acting alone but only by the joint efforts of many (strictly, all) countries. Some economists, along with global institutions such as the UN, reckon that such goods include international law and law enforcement, a stable global financial system, an open trading system, health, peace and environmental sustainability.
Industry:Economy
An inequality indicator. The Gini coefficient measures the inequality of income distribution within a country. It varies from zero, which indicates perfect equality, with every household earning exactly the same, to one, which implies absolute inequality, with a single household earning a country's entire income. Latin America is the world's most unequal region, with a Gini coefficient of around 0. 5; in rich countries the figure is closer to 0. 3.
Industry:Economy
Shorthand for gilt-edged securities, meaning a safe bet, at least as far as receiving interest and avoiding default goes. The price of gilts can vary considerably over time, however, creating a degree of risk for investors. Usually the term is applied only to government bonds.
Industry:Economy
