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The Economist Newspaper Ltd
Industry: Economy; Printing & publishing
Number of terms: 15233
Number of blossaries: 1
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The part of a country's or a firm’s capital or an individual’s human capital that consists of ideas rather than something more physical. It can often be protected through patents or other intellectual property laws.
Industry:Economy
Valuable things, even though you cannot drop them on your foot – an idea, say, especially one protected by a patent; an effective corporate culture; human capital; a popular brand. Contrast with tangible assets.
Industry:Economy
In economic terms, anything used to reduce the downside of risk. In its most familiar form, insurance is provided through a policy purchased from an insurance company. But a fuller definition would also include, say, a financial security (or anything else) used to hedge, as well as assistance available in the event of disaster. It could even be provided by the government, in various ways, including welfare payments to sick or poor people and legal protection from creditors in the event of bankruptcy. Conventional insurance works by pooling the risks of many people (or firms, and so on), all of whom might claim but in practice only a few actually do. The cost of providing assistance to those that claim is spread over all the potential claimants, thus making the insurance affordable to all. Despite the enormous attraction of insurance, private markets in insurance often work badly, or not at all. Economists have identified three main reasons for this. * Private firms are unwilling to provide insurance if they are uncertain about the likely cost of providing sufficient cover, especially if it is potentially unlimited. * moral hazard means that people with insurance may take greater risks because they know they are protected, so the insurer may get a bigger bill than it bargained for. * Insurers are at risk of adverse selection. The people who are most likely to claim buy insurance, and those who are least likely to claim do not buy it. In this situation, setting a price for insurance that will generate enough premiums to cover all claims is tricky, if not impossible. Insurers have found ways of reducing the impact of these problems. For example, to counter adverse selection, they set higher health-insurance rates for people who smoke. To limit moral hazard, they offer reduced premiums to people who agree to pay the first so-many dollars or pounds of any claim. An efficient system of insurance, in its broadest sense, can contribute to economic growth by encouraging entrepreneurial risk taking and by enabling people to choose which risks they take and which they protect themselves against.
Industry:Economy
The big hitters of the financial markets: pension funds, fund-management companies, insurance companies, investment banks, hedge funds, charitable endowment trusts. In the United States, around half of publicly traded shares are owned by institutions and half by individual investors. In the UK, institutions own over two-thirds of listed shares. This gives them considerable clout, including the ability to move the prices in financial markets and to call company bosses to account. But because institutions mostly invest other people’s money, they are themselves prone to agency costs, sometimes acting against the best long-term interests of the people who trust them with their savings.
Industry:Economy
A practice that was made illegal in the United States in 1934 and in the UK in 1980, and is now banned (for shares, at least) in most countries. Insider trading involves using information that is not in the public domain but that will move the price of a share, bond or currency when it is made public. An insider trade takes place when someone with privileged, confidential access to that information trades to take advantage of the fact that prices will move when the news gets out. This is frowned on because investors may lose confidence in financial markets if they see insiders taking advantage of advantageous asymmetric information to enrich themselves at the expense of outsiders. But some economists reckon that insider trading leads to more efficient markets: by transmitting the inside information to the market, it makes the price of, say, a company’s shares more accurate. This may be true, but most financial regulators are willing to sacrifice a degree of accuracy in pricing to ensure that outsiders (the great majority of investors) feel they are being treated fairly.
Industry:Economy
A vital contributor to economic growth. The big challenge for firms and governments is to make it happen more often. Although nobody is entirely sure why innovation takes place, new theories of endogenous growth try to model the innovation process, rather than just assume it happens for unexplained, exogenous reasons. The role of incentives seems to be particularly important. Although some innovations are the result of scientists and others engaged in the noble pursuit of know¬ledge, most, especially their commercial applications, are the result of entrepreneurs seeking profit. Joseph Schumpeter, a leading practitioner of Austrian economics, described this as a process of “creative destruction”. A firm innovates successfully and is rewarded with unusually high profits, which in turn encourages rivals to come up with a superior innovation. To encourage innovation, innovators must be allowed to make a decent profit, otherwise they will not incur the risk and expense of trying to come up with useful innovations. Most countries have patents and other laws protecting intellectual property, which allow innovators to enjoy a (usually temporary) monopoly over their innovation. Economists disagree over how long that protection should last, given the inefficiencies that result from any monopoly. For most of the second half of the 20th century, governments played a crucial role in funding and directing pure research and early-stage development. In the 1980s, however, legal changes in the United States started to reduce this role. One change aimed to move technological development out of the country’s state-financed national laboratories. Another allowed universities, not-for-profit research institutes and small businesses doing research under government contract to keep the technologies they had developed and to apply for patents in their own names. This appears to have contributed to a surge in innovation in the United States, as government researchers and university professors teamed up with outside firms, or started their own. Hoping for similar results, many other countries have followed suit. Is innovation all it is cracked up to be, or is it just change for change’s sake? A few years ago, Robert Solow, a Nobel prize-winning economist, observed that “you can see the computer age everywhere these days except in the productivity statistics”. Although new computer technology clearly had affected people and firms in visible and obvious ways, the slowdown in productivity growth that had afflicted the American economy since the 1970s did not appear to have been reversed. Believers in the new economy argued that the “Solow Paradox” no longer holds true; in the late 1990s, the computer revolution started to deliver the productivity growth long promised. Even so, this shows that innovation can take a long time to deliver the goods.
Industry:Economy
The economic arteries and veins. Roads, ports, railways, airports, power lines, pipes and wires that enable people, goods, commodities, water, energy and information to move about efficiently. Increasingly, infrastructure is regarded as a crucial source of economic competitiveness. Investment in infrastructure can yield unusually high returns because it increases people’s choices: of where to live and work, what to consume, what sort of economic activities to carry out, and of other people to communicate with. Some parts of a country’s infrastructure may be a natural monopoly, such as water pipes. Others, such as traffic lights, may be public goods. Some may have a network effect, such as telephone cables. Each of these factors has encouraged government provision of infra¬structure, often with the familiar downsides of state intervention: bad planning, inefficient delivery and corruption.
Industry:Economy
The oil that keeps the economy working smoothly. Economic efficiency is likely to be greatest when information is comprehensive, accurate and cheaply available. Many of the problems facing economies arise from people making decisions without all the information they need. One reason for the failure of the command economy is that government planners were not good at gathering and processing information. Adam Smith’s metaphor of the invisible hand is all about how, in many cases, free markets are much more efficient at processing information on the needs of all the participants in an economy than is the visible, and often dead, hand of state planners. Asymmetric information, when one party to a deal knows more than the other party, can be a serious source of inefficiency and market failure. Uncertainty can also impose large economic costs. The internet, by greatly increasing the availability and lowering the price of information, is helping to boost economic efficiency. But there are inefficiencies the internet will not be able to solve. Uncertainty will remain a huge source of economic inefficiency. Alas, potentially the most useful information, about what will happen in the future, is never available until it is too late.
Industry:Economy
The goal of monetary policy in many countries is to ensure that inflation is neither too high nor too low. It became fashionable during the 1990s to set a country's central bank an explicit rate of inflation to target. By 1998, some 54 central banks had an inflation target, compared with just eight at the end of 1990, the year in which New Zealand's Reserve Bank became the first to be set a target. In most industrialized countries, the target, or, typically, the mid-point of a target range, for consumer-price inflation is between 1% and 2. 5%. The reason it is not zero is that official price indices overstate inflation, and that the countries would prefer a little inflation to any deflation. Monetary policy takes time to have an impact. So central banks usually base their policy changes on a forecast of inflation, not its current rate. If forecast inflation in two years' time, say, is above the target, interest rates are raised. If it is below target, rates are cut. Why have an inflation target? Setting an inflation target usually goes hand-in-hand with allowing a central bank considerable discretion in setting policy, so transparency in its decision-making is vital and is therefore usually increased as part of the process of adopting a target. More fundamentally, by making it easier to judge whether policy is on track, an inflation target makes it easier to hold a central bank to account for its performance. The pay of central bankers can be designed to reward them for achieving the target. But some central bankers argue that an inflation target restricts their policy flexibility too much, which is one reason why the world's most powerful central bank, America's Federal Reserve, has argued (so far successfully) against having one.
Industry:Economy
Rising prices, across the board. Inflation means less bang for your buck, as it erodes the purchasing power of a unit of currency. Inflation usually refers to consumer prices, but it can also be applied to other prices (wholesale goods, wages, assets, and so on). It is usually expressed as an annual percentage rate of change on an index number. For much of human history inflation has not been an important part of economic life. Before 1930, prices were as likely to fall as rise during any given year, and in the long run these ups and downs usually cancelled each other out. By contrast, by the end of the 20th century, 60-year-old Americans had seen prices rise by over 1,000% during their lifetime. The most spectacular period of inflation in industrialized countries took place during the 1970s, partly as a result of sharp increases in oil prices implemented by the OPEC cartel. Although these countries have mostly regained control over inflation since the 1980s, it continued to be a source of serious problems in many developing countries. Inflation would not do much damage if it were predictable, as everybody could build into their decision making the prospect of higher prices in future. In practice, it is unpredictable, which means that people are often surprised by price increases. This reduces economic efficiency, not least because people take fewer risks to minimize the chances of suffering too severely from a price shock. The faster the rate of inflation, the harder it is to predict future inflation. Indeed, this uncertainty can cause people to lose confidence in a currency as a store of value. This is why hyper-inflation is so damaging. Most economists agree that an economy is most likely to function efficiently if inflation is low. Ideally, macroeconomic policy should aim for stable prices. Some economists argue that a low level of inflation can be a good thing, however, if it is a result of innovation. New products are launched at high prices, which quickly come down through competition. Most economists reckon that deflation (falling average prices) is best avoided. To keep inflation low you need to know what causes it. Economists have plenty of theories but no absolutely cast-iron conclusions. Inflation, Milton Friedman once said, “is always and everywhere a monetary phenomenon”. Monetarists reckon that to stabilize prices the rate of growth of the money supply needs to be carefully controlled. However, implementing this has proven difficult, as the relationship between measures of the money supply identified by monetarists and the rate of inflation has typically broken down as soon as policymakers have tried to target it. Keynesian economists believe that inflation can occur independently of monetary conditions. Other economists focus on the importance of institutional factors, such as whether the interest rate is set by politicians or (preferably) by an independent central bank, and whether that central bank is set an inflation target. Is there a relationship between inflation and the level of unemployment? In the 1950s, the Phillips curve seemed to indicate that policymakers could trade off higher inflation for lower unemployment. Later experience suggested that although inflating the economy could lower unemployment in the short run, in the long run you ended up with unemployment at least as high as before and rising inflation as well. Economists then came up with the idea of the NAIRU (non-accelerating inflation rate of unemployment), the rate of unemployment below which inflation would start to accelerate. However, in the late 1990s, in both the United States and the UK, the unemployment rate fell well below what most economists thought was the NAIRU yet inflation did not pick up. This caused some economists to argue that technological and other changes wrought by the new economy meant that inflation was dead. Traditionalists said it was merely resting.
Industry:Economy