Economicae^©

an illustrated encyclopedia of economics

Famous Economists

Mathematics of Economics

hard currency:	Hard currency is a currency that is accepted as a medium of exchange all over the world. Hard currencies are expected to remain stable over long periods, and are usually issued only by large and economically advanced nations. The US dollar is a hard currency because it is accepted in transactions almost everywhere. See also currency, soft currency, currency appreciation, and currency depreciation.
hard energy path:	Some environmentalists characterize the current environmental and energy policies of governments around the world as a “hard energy path.” Governments everywhere have traditionally stressed technological advances to increase the supplies and utilization of fossil fuels. Continuing a hard energy path will likely yield increases in entropy, negative externalities, and environmental harm. Contrast with soft energy path.
hard landing:	An economy undergoes what is called a “hard landing” when a period of expansion is abruptly followed by a sharp recession. A hard landing is usually a result of very restrictive monetary and fiscal policies being implemented rapidly in attempts to quell inflationary pressure.
hard loan:	A hard loan is a loan renewal for which commercial rates of interest are changed with no concessions being made to the borrower.
hard peg:	A hard peg is the practice of rigidly fixing exchange rates between the currencies of two countries, usually between the currencies of a small country and an industrialized superpower. Hard pegs are used by smaller and less economically stable countries to foster economic stability. For example, small countries may “hard peg” their currencies to the US dollar.
Hayek, Friedrich	Friedrich Hayek [1899-1992] was a stalwart of Austrian economics who won the Nobel Prize in Economics in 1974. His most popular work was The Road to Serfdom, in which he warned about the dangers of excessive government.
head tax:	A head tax is a tax of fixed amount collected from every person in the domain of a government. See also poll tax.
headhunter:	Headhunters are individuals or firms that attempt to locate, screen, and recruit employees with skills and other characteristics specified by a client firm that wants to fill a particular job opening. Headhunters often try to recruit the employees of its clients business rivals.
health maintenance organizations:	Health maintenance organizations (HMOs) are firms organized as either “for profit” or nonprofit corporations and are essentially diversified insurers that acquire medical facilities and equipment, and then purchase pharmaceuticals and hire medical personnel (sometimes as subcontractors) to cover the health needs of “members” for a fixed fee per person. See also capitation.
Heckscher-Ohlin model of trade:	The Hechscher-Ohlin model of international trade predicts that countries will tend to import goods for which production is relatively intensive in the resources relatively scarce within its borders, and will export goods for which production is relatively intensive in the resources that are relatively abundant in the country. For example, suppose that the United States has a relative abundance of capital relative to labor in comparison to China (or the rest of the world), so that its capital to labor ratio exceeds China’s capital to labor ratio (K/L)US > (K/L)C. Suppose further that textiles require more labor relative to capital, while the manufacture of electronic medical equipment requires relatively sophisticated computing and a higher capital to labor ratio (K/L)M > (K/L)T. The Hechscher-Ohlin model predicts that the United States will import textiles from China and export medical technology to China. This model was developed by Eli Heckscher [1879-1952] and Bertil Ohlin [1899-1979, Nobel Prize 1977] of Sweden in the 1930s, and refined and extended significantly by Paul A Samuelson [1915- , Nobel Prize 1970]. See also factor price equalization.
hedge:	A hedge is behavior or a mechanism intended to reduce risk. The diversification of a financial portfolio is one form of hedging. Another example: A bookie may hedge by betting on team Y with another bookie if too many of the bookie’s own clients have bet on team Y. This hedge bet reduces the risk to the bookie that team Y wins. See also dynamic hedging.
hedge fund:	A hedge fund is, de facto, a special type of mutual fund that is relatively less regulated by government than standard mutual funds because a hedge fund can accept only investors with net worth of at least one million dollars, such investors being assumed diligent and knowledgeable and therefore, less in need of protective regulation. The investment portfolios of hedge funds are usually significantly riskier that those of standard mutual funds, and on average, they generate higher than average rates of return. See also mutual fund.
hedonic model:	A hedonic model is an attempt to identify variables that are positively related to pleasure. For example, in a hedonic model of labor markets, all else equal higher wages would positively reflect the relative unpleasantness of particular jobs. Similarly, a hedonic model of the market for cars would identify characteristics that consumers would view as positively related to quality by the relative prices increases associated with particular accessories or features.
hedonic price index:	A hedonic price index is a price index adjusted for changes in quality. For example, you could buy a laptop computer three years ago for $1,000 and you can buy a laptop computer today for $1000. Suppose, however, that the laptop currently available for $1,000 has the same computing power as a laptop that would have cost $2,500 three years ago. The hedonic price of laptops has declined sixty percent, but a standard consumer price index would show price stability for laptops.
hedonic treadmill:	The hedonic treadmill refers to a psychological tendency for people to quickly become so accustomed to higher incomes and increased luxuries, and to the convenience of improved technologies, that further increases in their subjective levels of satisfaction require ever greater increments of income, luxury, and technology. See also aspirational treadmill.
hedonism:	Hedonism, a philosophy that advocates the pursuit of pleasure and the avoidance of pain, is closely related to utilitarianism and to Epicureanism. The label is based on the Greek word for pleasure.
hegemony:	Hegemony refers to a significant concentration of international political influence and military and economic might in the hands of a single nation. This enables the hegemon to play a dominant role in setting international economic and political rules. The Roman, Spanish, and British Empires were hegemons in bygone eras. Although the United States and the USSR were serious rivals following World War II, since roughly 1990 the United States has owned uncontested titles to the world’s largest economy and most powerful military, and it is [at least temporarily] the world’s largest creditor nation.
herd behavior:	Herd behavior refers to the tendency of individuals to mimic the behavior of other individuals, especially when the other individuals comprise a large group. Herd behavior is a heuristic that works well when the herd is responding rationally to a change in the environment, but an individual who follows the herd may encounter misfortune caused by problems of aggregation. The herd may develop an inimical momentum, as when a bubble is created because many financial investors view an upward trend in prices as indefinitely sustainable and consequently buy financial assets aggressively, or when panic causes herds of investors to liquidate their assets. John Maynard Keynes referred to the “animal spirits” of investors to explain the resulting volatility of financial markets. Contrast with financial fundamentalism.
Herfindahl-Hirschman Index:	The Herfindahl-Hirschman Index (HHI) is the sum of the squares of the market shares of the firms in an industry. HHIs are now used as a guideline for antitrust actions.
heteroskedasticity:	Heteroskedasticity is an inconsistency in the variations between data points in a data set and is a problem for statistical analysis because it causes the variance of error terms for observations to differ between observations. Heteroskedasticity often causes the predictions of statistical models to be inaccurate..
heuristics:	Heuristics are mental shortcuts that people use when evaluating decisions because they cannot perform all the mental gymnastics necessary to perfectly process information so that their decisions are mathematically optimal, given all the information that is available and known. An example of the use of a heuristic would be a shopper who “eyeballs” the contents of a grocery cart to estimate whether or not the shopper has enough cash on hand to pay for the groceries. The shopper could, instead, know the answer with certainty by summing the prices of the items as each was placed in the cart, and continuously adding the appropriate sales tax. The “eyeball” approach is a convenient heuristic. See also computational complexity.
high mass consumption:	High mass consumption is the fifth and final stage hypothesized by Walt W. Rostow’s when developing his theory about stages of economic development. During this stage, services, become very important, and significant amounts of consumer goods are widely available for almost all members of society.
high-powered money:	High-powered money is a synonym for monetary base – funds that can legally serve as reserves in banks.
hindsight bias:	The tendency of people to view themselves as having been better at predicting events than they actually were is called hindsight bias, which is also known as “Monday morning quarterbacking.” We tend to have convenient memories. After an event has occurred, people often selectively remember evidence that would have helped them predict an occurrence, and tend to deemphasize evidence auguring for a different outcome. For example, a voter might have expected Hillary Clinton to be the Democratic Party’s presidential candidate in 2008. After Barak Obama became the nominee, this voter might remember and emphasize more strongly all the reasons favoring the success of Obama’s candidacy, while tending to forget many advantages that Clinton appeared to have. This voter’s retroactive belief that Obama was the obvious winner is a consequence of hindsight bias bolstered by a convenient memory. See also overconfidence and selective memory.
hiring hall:	A hiring hall is an employment allocation office established by a union to spread available work to its members. Rules governing job allocation range from seniority to first come, first served.
historicism:	Historicism is the theory that historical events are crucial in determining future events. See also hysterisis and path dependence, and contrast with determinism.
hit-and-run competition:	Competitors quickly enter a market characterized by hit-and-run competition when it appears to be profitable, and quickly exit when most firms in the industry experience losses. Hit-and-run competition is most common when economies of scale are insignificant so that only low fixed costs are encountered with entry or exit.
hoarding:	Hoarding is holding money in idle cash balances. Money that is hoarded is not spent on consumption or investment; and causes velocity to fall.
holding company:	A holding company is a corporation that owns or controls subsidiary corporations. Holding companies are commonly horizontally integrated. For example, a bank holding company may own a large number of subsidiary commercial banks.
homeostasis:	Successful homeostatic systems (organisms, organizations, or entire societies) have developed mechanisms that tend to automatically maintain the functioning of their structures. Environmental shocks are accommodated through interactions between interdependent regulatory mechanisms that tend, in an organism, to maintain such metabolic functions as temperature and blood pressure. (Shivering in response to cold, for example, automatically generates heat through friction, and coughing clears the wind pipe.) In organizations, according to the sociologist Talcott Parsons, rules and regulations abound and are modified in predictable ways that tend to maintain class, status, and power relationships in the organization, and societies everywhere impose sanctions on individuals who threaten to abruptly overturn the status quo. In classical and neoclassical economic theory, Adam Smith’s “invisible hand” of the marketplace operates as a homeostatic mechanism, using the prices of goods and resources as signals to automatically regulate economic activity.
Homo economicus:	The conventional economist’s view that all human behavior is rationally self-interested is sometimes described as viewing people as members of the species Homo economicus. Contrast with behavioral economics.
homogeneity of degree n:	A function is homogeneous of degree n if multiplication of all elements of the functions by a constant scalar α yields an increase in the value of the function by a^n. Thus: a^n ¦(x1, x2,..., xn) = ¦(ax1, ax2, .... , axn). All homogeneous functions are also homothetic in that, shown in two dimensions, all their level sets are uniform radial expansions of each other. See also Cobb-Douglas production function.
homogeneity of degree one:	A function is linearly homogeneous (homogeneous of degree one) if multiplication of all elements of the functions by a constant scalar α yields an increase in the value of the function by a. Thus: a¦(x1, x2,..., xn) = ¦(ax1, ax2, .... , axn). See also linearly homogeneous function.
homogeneity of degree zero:	A function is homogeneous of degree zero if multiplication of all elements of the functions by a constant scalar α yields an increase in the value of the function by a^0 = 1. Thus: a^0¦(x1, x2, ... , xn) = ¦(ax1, ax2, .... , axn), and the function is unaffected if the variables x1, x2, ... , xn are all changed by any constant factor a because a^0 = 1.
homogeneous product:	Homogeneous products are viewed as identical from the perspectives of consumers, who are indifferent between units of the good. Each unit is perceived as a perfect substitute for every other unit of the good, regardless of what firm produced it.
homothetic preferences:	Homothetic preference functions yield income elasticities of demand equal to 1 for all goods across all possible levels of income because all level sets (i.e., indifference curves) are radial expansions of each other when a function is homothetic. This means that the composition of preferred consumption is determined strictly by the relative prices of the goods, and not by the level or distribution of income.
horizontal combination:	A horizontal combination is a firm operating numerous plants producing identical or similar products.
horizontal equity:	The normative principle of horizontal equity requires that individuals who are equal in all important respects be treated equally. For example, individuals who are considered equally well off and who benefit equally from government programs should pay equal amounts of taxes. Horizontal equity is hard to achieve because it is difficult to determine who is considered equally well off. Many factors such as the number of children, house size, and marital status influence the definition of “equal in all important respects.”
horizontal merger:	A horizontal merger is a merger between firms operating in the same industry.
horizontal spread:	A horizontal spread is a market strategy based on options whereby a financial investor takes advantage of differences in the expiration month of similar options. A difference in expirations month but similarity in striking price may provide the possibility of gains. Competition among arbitrageurs tends to eliminate these spreads. See also option, striking price.
horizontal summation:	The process of summing variables along the x-axis (e.g., the various quantities of a good that people will buy or sell) for each value measured along the y-axis (e.g., each possible price for that good).
horizontally integrated:	See horizontal combination. Click on the link to examine the relationship between horizontally and vertically integrated firms.
hostile takeover:	A hostile takeover is the acquisition of one corporation by another that is opposed by the management of the acquired corporation. See also takeover.
hot money:	Funds that flow across international borders rapidly in response to perceived differences in real rates of interest or real rates of return or because of mounting expectations that exchange rates are likely to change are described as hot money. The movement of hot money boosts the exchange rate for the currency of the recipient country, while weakening the currency of the country out of which hot money is flowing.
Hotelling location model:	The Hotelling location model hypothesizes that a duopolistic or oligopolistic firm often finds it advantageous to locate in the center of the market, where “center” may be defined either geographically or by product characteristics. This enables the firm to maximize market share by reducing transportation costs for customers, or persuading customers that the firm’s products area safe compromise. Such location decisions result in product homogeneity and adjacent (clustered) locations for similar firms. The median voter model is based on similar reasoning.
household income:	Household income is ultimately used for consumption, saving, or taxes: Y = C + S + T.
households:	Households are centers for consumption and ultimately own all wealth, including all resources, which they provide to firms or government in exchange for income.
house-money effect:	An investor is manifesting a house money effect when windfall increases in income or returns that exceeded expectations cause the investor to compartmentalize money into “permanently mine” and transitory components, with the result that the investor engages in riskier behavior with that wealth that was viewed as transitory. Alternatively, a house money effect is operating when moral hazard causes an individual on the verge of bankruptcy to engage in extraordinary risky behavior (a blackjack game in Las Vegas, for example) because the funds at risk are owed to another individual, and the risk taker shares in upside risk, but is not subject to downside risk.
how?:	The basic economic question “how?” addresses the types of technology and combinations of resources that will be used in production.
Hubbert's pimple:	Hubbert’s pimple is a graph of the intensity of fossil fuel use during the period across which human beings have relied and can continue to rely on fossil fuels. Coal and other fossil fuels were not used as energy sources until roughly one thousand years ago, when coal came into use. Given current rates of growth in the use of fossil fuels, the expectation is that economically viable supplies of fossil fuels will be exhausted within the next hundred years or so, but that resource depletion will cause diminishing reliance on fossil fuels within the next thirty years.
human capital:	The term human capital refers to productive improvements (e.g., education, on-the-job training) to the labor embodied in human beings enabling them to become more productive and more highly paid.
human capital discrimination:	Human capital discrimination is a barrier that reduces access by certain groups to schooling, on‑the‑job training, or to human capital investments.
Human Development Index (HDI):	A Human Development Index (HDI) is published annually by the United Nations, and attempts to ranks nation according to quality of life enjoyed by its citizens, only parts of which rely on such pure measures of economic activity as national Income. For example, in addition to GDP per capita the HDI considers life expectancy, adult literacy, school enrollment, gender equality, diet, unemployment rates, and income security.
human poverty index:	The human poverty index is an attempt to identify the minimum income level required to ensure that people need not experience absolute poverty, in which basic survival is at high risk. A related measure in the United States is the poverty line.
Humphrey-Hawkins Act:	The Humphrey-Hawkins (Full Employment and Balanced Growth) Act (1978 augments the Employment Act of 1946 by (a) identifying specific economic priorities; (b) directing the president to establish goals based on those priorities; and (c) creating procedures to improve the coordination and development of economic policy between the president, the Congress, and the Federal Reserve System.
hyperinflation:	Hyperinflation is the process wherein increases in the price level exceed rates of 50 percent per month.
hypothesis:	A hypothesis is a theory or conjecture about the way some aspect of the world works. To be scientific, a hypothesis must be testable for its truth or falsity.
hysterisis models:	Hysterisis models assume that history matters (in contrast to natural rate macroeconomic models, for example), and that such aggregates as unemployment, inflation, or rates of technological progress are affected by the recent path of the economy. Persistent unemployment, for example, may tend to self-perpetuate because unemployed workers become rusty. Symmetrically, prosperity and low unemployment rates also tend to be self-reinforcing because workers acquire more human capital through on-the-job training. Similarly, if firms are encouraged to innovate by the prospects of profit during prosperity, “spin-offs” from new technology tend to generate further technological advances.