Economicae^©

an illustrated encyclopedia of economics

Famous Economists

Mathematics of Economics

Fabian socialism:	In a system of Fabian socialism, extensive welfare programs would ensure that people’s needs were met, and only heavy industry would be nationalized. All other property would be privately owned. For example small scale entrepreneurs would own pubs, bakeries, and fishing boats – firms in industries not subject to significant economies of scale. Founded at the dawn of the 20^th century, Fabian socialists included many of England’s most prominent intellectuals. The Fabian socialist movement evolved into the Labour Party shortly after its founding, and gradually replaced the Liberal Party as the primary rival of the Conservative Party in Great Britain.
factor abundance:	Factor abundance refers to the relative proportions of resources with which different countries are endowed. Consider the relative endowments of capital (K) and labor (L) in Bangladesh compared to the United States. The ratio (K/L)US > (KL)BD, i.e., the amount of capital relative to the amount of labor is much greater in the United States than in Bangladesh. Consequently, the United States is said to be relatively capital abundant, and Bangladesh is relatively labor abundant.
factor endowments:	Factor endowments are the amounts of various resources in a nation at a particular point in time.
factor intensity:	Factor intensity refers to the amount of a resource (such as labor) used in a production process relative to the amount of another resource used in the production process, in comparison to the relative mix of these resources used in another production process. Consider the capital-to-labor (K/L) ratios used, in equilibrium, to producing two specific goods, A and B. If (K/L)A exceeds (K/L)B, then good A is a capital-intensive good, and good B is a labor-intensive good.
factor price equalization:	Factor price equalization is the tendency for international trade to cause wages for comparable work to become uniform for all countries engaged in trade, and for rates of returns to capital to become uniform as well. As a consequence of the expansion of international trade (globalization), unskilled workers in such countries as the United States (a relatively small percentage of Americans) increasingly compete with unskilled workers in the rest of the world (where unskilled labor is relatively abundant), and US wage rates for unskilled workers tend to fall while wage rates in less-developed countries rise. However, highly skilled American workers and owners of capital tend to gain significantly from trade because human and physical capital, though relatively abundant in the United States, is relatively scarce in much of the rest of the world. The German economist Wolfgang Stolper and the Nobel Prize winning economist Paul A. Samuelson developed a “factor price equalization theorem” [also known as the Stolper-Samuelson theorem] as a corollary to the Heckscher-Ohlin model of international trade. See also Heckscher-Ohlin model.
factoring:	The sale of a loan by one financial institution to another is sometimes called “factoring.”
factors of production:	Factors of production (often referred to as resources) are traditionally categorized as land, labor, capital, and entrepreneurship. (Labor is increasingly decomposed into unskilled labor and human capital.) Alternatively, factors of production can be categorized as providing the knowledge (or technology) to apply energy to make goods or other resources more valuable. Resources or factors of production are also often simply called inputs.
fair bet:	A fair bet is a zero sum game in which no agent has an expectation of either gain or loss. For example, if correctly predicting “heads” or “tails” on the toss of an unbiased coin yields a payment of $10, a fair bet would entail a required payment of $10 to play this game. An insurance policy would be a “fair bet” if the expected loss associated with a risky event was precisely equal to the insurance premium charged. However, insurance companies incur such costs as payments to employees, etc., so that the premium charged for an insurance policy is usually calibrated to yield a positive expected value for the insurance company and a negative expected vale (a loss) for the policyholder. However, policyholders who conceal information about the likelihood of covered events (e.g., an intent to commit arson to cash in on fire insurance) may have expected positive returns from insurance coverage.
faith:	Faith is a fervently held belief about something for which there is no proof. Nihilism is the paradoxically firm belief that faith can be rejected as a pathway to truth. Contrast with pragmatism.
fallacy:	A fallacy is a flawed conclusion, and fallacies come in a tremendous variety of flavors. For examples, see ad hominem fallacy, post hoc ergo propter hoc fallacy, and the other fallacies listed immediately below.
fallacy of appeal to authority:	An appeal to authority does not provide an argument with logical foundations. The authority cited may be either correct or wrong. For example, citing Ptolemy’s ancient assertion that the earth is flat is not proof that the earth is flat. Similarly, citing an article from The New York Times or a passage from the Bible to support an argument is not a use of logic per se, although facts cited from these sources may be premises that support one’s arguments.
fallacy of composition:	A fallacy of composition is an erroneous conclusion that because something is true of each component of a phenomenon, it must be true of the entire phenomenon. Carbon monoxide provides a simple example. Carbon helps support life. Oxygen also helps support life. However, the conclusion that carbon monoxide will support life is clearly false. In fact, excessive carbon monoxide will kill you. In a similar vein, a crowd of people may behave very differently than would any of its individual members if alone (e.g., a mob of drunken sports fans celebrating a victory). A final example: A basketball player who tries to play against a five member team is unlikely to score one-fifth as many points as any team composed of five individuals, even if they are less talented on average.
fallacy of decomposition:	The whole may be either greater than (synergy) or less than the sum of its parts. A fallacy of decomposition is an erroneous inference that something that is true of a phenomenon is true of its components. If you buy all of a cow's components at your local butcher shop, you will still be unable to assemble a cow.
fallacy of the excluded middle:	Also known as the either-or fallacy, the fallacy of the excluded middle is committed when alternatives are incorrectly perceived as dichotomous. Here is an example of deductive reasoning in which the fallacy of the excluded middle is committed. (1) People are either Asiatic or Caucasian or Negroid. (2) Tiger Woods is a person. (3) Therefore, if Tiger Woods is not Asian, and he is not Caucasian, then he is a Negro. The fallacy here is the assumption that race is defined by neat and exclusive categories. Tiger Woods is in fact proud of all of his ancestry, and rejects being categorized by any either-or system.
fallen angel:	A fallen angel is a bond issue that previously had credit ratings of investment grade but with ratings that have declined to less than Baa. Fallen angels are categorized with junk bonds, although the term junk bonds usually refers to bonds with low credit ratings at the time they were issued. See also junk bonds.
familiarity effect:	The familiarity effect is the tendency to judge current behavior based on the outcomes of previous behavior viewed as similar. For example, a parent manifests a familiarity effect when approving a child’s plan to attend the college the parent attended, regardless of the characteristics of the child or how the college may have changed in intervening years.
family allowance plan:	Many European nations now have family allowance plans (FAPs) which provide assistance in the form of negative income taxes based on the number of minor children in a family. FAP payments are usually adequate to feed and to clothe each child in the family and are made regardless of the family’s income.
fascism:	In their least pejorative uses, the terms “fascism” and “national socialism” refer to economic systems in which the ownership of resources in an economy is primarily private, but modes of production and the mix of outputs is primarily determined by the central government. However, the terms fascism and national socialism (Nazism) are more commonly applied to genocidal dictatorships, most notably the regimes of Adolf Hitler in Germany and Benito Mussolini in Italy, which lasted from the early 1930s until the end of World War II.
favorable selection:	Favorable selection, or “cherry picking”, is the reverse of adverse selection. One economic entity [call this entity Party One, which might be a firm or principal] chooses to contract with Party Two [drawn from a subset of e.g., potential employees, clients, or customers] based on characteristics expected to yield Party One lower costs or greater benefits than had Party One contracted with other entities in the potential set. Examples of favorable selection would include an HMO attempting to cover only relatively healthy patient populations, or an auto insurance company’s attempts to choose clients with characteristics [good driving records, age, occupation, education, gender, or place of residence] associated with a lower probability of having auto accidents.
favoritism:	Favoritism is a principal-agent problem that occurs when an agent who controls the granting of a contract (e.g., a job) has a personal interest in the well-being of some competing party (e.g., a relative) relative to the well-being of some other competing party (i.e., an outsider), independently of whether the ultimate contract is consistent with the goals of the organization (principal) granting the contract. See also self-dealing and nepotism and contrast with arm’s length transaction.
featherbedding:	Featherbedding is the employment of workers who are not in productive jobs, and is normally a result of union pressure or inefficient government regulation.
Federal Aviation Administration:	The Federal Aviation Administration regulates pilot training, aviation safety, and airline flight patterns in the United States.
federal budget:	The federal budget is balanced when the government’s tax revenues equal its outlays of funds, a budget deficit exists when its outlays exceed revenues, and a budget surplus exists if tax revenues exceed outlays.
Federal Communications Commission:	The Federal Communications Commission (FCC) regulates broadcasting, telephone, and other communication services.
Federal Deposit Insurance Corporation	The Federal Deposit Insurance Corporation (FDIC) is a federal regulatory agency that insures for up to $100,000 each deposit account in banks that are members of the Federal Reserve System.
federal funds market:	Banks that are members of the Federal Reserve System borrow or lend very large amounts of reserves for very short periods through the privately-operated federal funds market. This allows banks temporarily close to being short of their required reserves to borrow reserves from banks that have “excess” excess reserves. Federal funds are usually loaned for one day, and if renewed, are renewed daily.
federal funds rate:	The federal funds rate is the interest rate charged in the federal funds market. The federal funds rate, though technically set in a privately operated market, has become extremely important in the past decade or so because it is now the major short-term target announced by the Fed Open Market Committee. The FOMC directs its open market operations to steer the federal funds market towards the targeted interest rate.
Federal Maritime Commission:	The Federal Maritime Commission regulates foreign and domestic ocean commerce.
Federal Open Market Committee	The Federal Open Market Committee (FOMC) is the major policymaking body within the Federal Reserve System.
Federal Register:	The Federal Register is a daily compilation of federal regulations and legal notices, presidential proclamations and executive orders, federal agency documents having general applicability and legal effect, documents required to be published by act of Congress, and other federal agency documents of public interest.
Federal Reserve Board of Governors:	The Federal Reserve Board of Governors is the governing body of the Federal Reserve System, and comprises seven members appointed to fourteen-year terms of office by the President of the United States, with the advice and consent of the U.S. Senate. One member of the Board of Governors is appointed Chairman, and serves a four year term of office unless reappointed by the President and reconfirmed by the Senate.
Federal Reserve System	The Federal Reserve System (FED) is the central bank of the United States. The FED was established in 1914 after being enacted by Congress in 1913. Initially, the FED was intended to buffer financial crises by acting as a bankers’ bank and lender of last resort, but the FED’s primary role has been expanded to oversee almost all aspects of monetary policy.
Federal Savings and Loan Insurance Corporation:	The Federal Savings and Loan Insurance Corporation (FSLIC) is a federal agency that insures deposits of member Savings and Loan Associations.
Federal Trade Commission	The Federal Trade Commission (FTC) Act (1914) created the Federal Trade Commission and empowered the FTC to challenge any “unfair methods of competition ... , and unfair or deceptive acts or practices in or affecting commerce.”
fee simple property rights:	Fee simple property rights allow the owner to use property in almost any fashion, including sale or destruction, as long as the physical property (but not necessarily its financial value) of others is unaffected.
fee-for-service:	A fee-for-service medical system entails medical payments (usually to doctors) tailored to specific medical procedures. See also capitation and health maintenance organizations [HMOs]. Click on the link on asymmetric information for a look at fee-for-service compared to supplier-induced demand in the medical profession.
feudalism:	Feudalism is an economic system that precedes capitalism and the advent of the market system. According to Karl Marx, this third stage of history was preceded by pre-history and then primitive culture, during which civilization emerged as hunter-gatherers settled land and joined together into agricultural societies. During feudalism, the offspring of successful warlords became wealthy landowners, who were titled but most of whom owed their ability to protect their turf to a king. The actual production on the manors of these warlords was done by peasants who owned no land and paid a share of their crops to the titled landowners. See also sharecropping.
fiat money:	Fiat money is currency issued by government and backed only by faith in its purchasing power. Fiat money has no value as a commodity and is valuable only because of its use as money. (Fiat can be interpreted as: “because we command.”) Contrast with commodity money.
fiduciary:	A fiduciary is an individual or institution with legal duties to act responsibly in investing or guarding the funds or managing the properties of other people or organizations.
fill-or-kill:	“Fill or kill” is a market order to buy or sell a security that must be either completely and immediately filled or canceled by the broker.
final goods:	Final goods require no further production before use by a consumer or before use by a firm as capital (e.g., equipment or buildings). Inventories of parts at an automaker are not final goods, for example, but a car is a final good.
financial assets:	Financial assets are documents establishing either direct or indirect ownership of economic capital, or establishing rights to future payments from external parties. Examples include stocks, bonds, bank deposits, or deeds for real estate.
financial capital:	Financial capital is the term economists use to distinguish paper claims (e.g., stocks, bonds, or currency) to goods or resources from the real physical capital that economists consider a productive resource.
financial crises:	Financial crises occur when significant numbers of financial institutions become unable to honor demands for withdrawals of the funds with which they have been entrusted, or when rampant speculation destabilizes the currency of a country.
financial institutions:	Financial institutions perform important economic roles by channeling funds from savers to investors, providing secure places for savers to keep their deposit, and facilitating flows and payments of funds. They include commercial banks, thrift institutions such as mutual savings banks and credit unions, insurance companies, and securities markets.
financial instrument:	A financial instrument is a document, whether real or virtual [i.e., available on-line], that legally specifies ownership rights to a particular asset.
financial insulation:	Financial insulation occurs when organizations develop new technologies that allow them to use money more efficiently so that more transactions can be supported from a given amount of monetary base. Financial insulation helps shield a firm from the negative effects of contractionary monetary policies caused by rising interest rates and increases in credit rationing.
financial intermediation:	Financial intermediation is the process by which household saving is made available through financial institutions to those desiring to spend in excess of their income (especially investors). Banks, insurance companies, and mutual funds are examples of financial intermediaries that channel saving to investment.
financial investment:	Financial investment refers to purchases of paper documents representing financial claims on assets. Financial investments are created or transferred when stocks, bonds, and real estate are purchased.
financial markets:	Financial markets, sometimes called credit markets, are institutions through which stocks, bonds, options, and other financial securities are transacted.
financial panic:	Financial panics occur when numerous owners of financial assets (e.g., bank deposits, or corporate securities) become anxious about their ability to collect, and simultaneously try to “cash-out” all their funds. The race to cash-out hastens the decline or total collapse of the institution with the liability for these assets. Financial panics may accompany the bursting of a major speculative bubble, and bank runs may signal financial panic in the banking system. See also bank runs.
fine-tuning:	Fine-tuning is an extreme version of Keynesian policy by which government attempts to make the economy function as smoothly as possible by frequently changing both monetary and fiscal policies to offset even minor fluctuations in economic activity.
fire:	Verb: To fire an employee is to discharge the worker for cause, and may involve dishonesty or failure to perform satisfactorily – shirking or malingering. Contrast with layoff.
firm:	A firm is a privately owned (non-governmental) operation engaged in buying resources from households, and then combining these resources to produce goods or services for purchase or use by external parties. See also circular flow model.
firm supply curve:	A firm’s supply curve shows the various amounts of output the firm is willing and able to sell per period in the marketplace at alternative prices.
first degree price discrimination:	First degree price discrimination occurs when a seller is able to charge every buyer each buyer’s demand price for every unit of a good purchased. First degree price discrimination means that all potential consumer surpluses for the amount of the good purchased are transformed into revenues for the seller. See also demand price, consumer surplus, price discrimination, second degree price discrimination, block pricing, and third degree price discrimination.
first mover strategy:	The first mover strategy (from game theory) entails being the first to act, and is usually based on expectations that being the first to e.g., adopt a new technology or enter a market will confer an advantage over rivals that take the action later. See also second mover strategy.
fiscal drag:	Fiscal drag is a tendency to generate budget surpluses in a growing economy because of our progressive income tax, assuming that government spending and tax rates remain unchanged. Fiscal drag retards growth of Aggregate Demand. This concept is attributed to Arthur Okun (1928-80), who headed the Council of Economic Advisors during President Lyndon Johnson’s administration. See also Laffer curve.
fiscal federalism:	Fiscal federalism is a system wherein different activities are undertaken by different levels of government, e.g., federal, state, and local government units. The budgets of each level of government are determined at that level, although there may be transfers of funds and duties between the various levels of government.
fiscal policy:	Fiscal policy is term applied to the structure of government spending and tax rates or revenues. Fiscal policy may either stimulate or contract economic activity, and is intended to dampen or offset cyclical fluctuations in economic activity. See also discretionary fiscal policy and automatic stabilizers.
fiscal year:	A fiscal year is an accounting period of 12 months, not necessarily beginning on January 1st.
fiscalist view:	The fiscalist view is the traditional Keynesian perception that, in a severely depressed economy is totally unresponsive to conventional monetary policy, and that only increases in government spending will trigger increases in national income and output during any period relevant as a policy horizon. In the words of John Maynard Keynes, “in the long run we are all dead,” and “money is a string” because the economy is in a perfect liquidity trap and investment depends on expectations, not interest rates.
Fisher effect:	The Fisher effect refers to adjustments of nominal interest rates as borrowers and lenders compensate for expected inflation or deflation to secure some equilibrium “real” rate of interest. These adjustments were first described by Knut Wicksell (who wrote in Swedish) but are usually attributed to the American economist Irving Fisher (1867-1947). The Fisher effect is sometimes called the expectations effect. See also Fisher equations.
Fisher equation:	A Fisher equation is the relationship between the nominal annual rate of interest (in) and the real annual rate of interest (r*). As a close first approximation, if ρ equals the annual rate of inflation experienced across an investment period, then ex post, r* = in – ρ – [in × ρ]. Because Irving Fisher believed (and most modern monetary theorists now believe) that borrowers and lenders eventually learn to anticipate inflation then, ex ante, nominal rates of interest will be adjusted to accommodate expected inflation E(ρ) and loan contracts will incorporate nominal interest rates in accord with the equation: ex ante in = r*+ E(ρ) + [in × E(ρ)]. This equation is the foundation of the Fisher effect. Note: The multiplied terms in the brackets ensure that “real” interest is realized on the “inflated” interest income paid or received.
Fisher, Irving:	Irving Fisher (1867-1947) was the most prominent American economic theorist of the first half of the twentieth century. He was devoted to quantification and developed a uniquely American version of the neoclassical quantity theory of money. As a social reformer, he lobbied for prohibition and, as an inventor, became rich by developing such useful items as folding chairs and the Rolodex (a wheel upon which some business firms still keep records of the business cards of customers and other contacts.)
fixed coefficient production:	A production process is based on a fixed coefficient production function if, while holding one input constant, increasing another input does not yield additional production. For example, if only one recipe for cherry pie is considered, then no additional cherry pies are baked if we increase the amounts of sugar and flour, but not cherries, nor will additional cherries without extra sugar and flour result in extra cherry pies. However, substitution of one input for another is rarely precluded. In contrast, see neoclassical production function.
fixed costs:	Also known as “historical,” “sunk,” or “overhead” costs, fixed costs are costs incurred even if a firm’s output is zero, and are irrelevant for rational decision-making. Examples include the prices paid in the past for land or capital.
fixed exchange rates:	A fixed exchange rate system entails international agreements to set the values of all currencies in terms of one another; the exchange rates of currencies are not allowed to respond to changes in the relative supplies and demands for the currencies; balance of payments surpluses and deficits occur in a fixed exchange rate system when equilibrium exchange rates differ from the fixed (pegged) exchange rates and can be eliminated only through adjustments of Aggregate Demands or Aggregate Supplies.
flat tax:	A flat tax is a tax with a constant marginal tax rate. Flat taxes are often assumed to be proportional taxes, but they may be progressive if they do not apply below some threshold level of income. See also negative income taxes.
flexible exchange rates:	Flexible (floating) exchange rate systems are the major alternative to a system of fixed exchange rates. In a flexible exchange rate system, the relative demands and supplies of individual currencies in markets determine the equilibrium and actual exchange rates.
flexible wages, prices, and interest rates:	Flexible wages, prices, and interest rates are prices for labor, goods, and capital, respectively, that respond rapidly to ensure that markets clear. According to classical theory, full employment was guaranteed by the existence of perfectly flexible wages, prices, and interest rates. See also Say’s law.
float:	The “float” refers to funds in demand deposit or money market accounts for which checks have been written, but the funds have not yet been deducted the check writer’s account. Float time is the period that elapses between a transaction and when the financial documents are fully processed, e.g., the time between when a check is written and when it finally clears the bank.