A - C

Adverse selection:
An unequal or inefficient exchange on the market caused by differences in information (or information asymmetry) between the two parties. For example, a used-car salesman has better information on the cars he's selling than the customer, and therefore a better idea of its true market value. If the two begin negotiating over price, the salesman will accept offers that are too high, and reject offers that are too low. The result is that the only cars that get sold are the ones customers overpay for. (Hence, adverse selection is also known as "the market for lemons," after the title of George Akerlof's famous paper introducing the concept.) Another common example of adverse selection is the insurance industry. Adverse selection occurs when customers who are sick hide their risk while applying for health insurance. Adverse selection is also said to occur when insurers screen for low-risk applicants they won't have to pay out to. The effect is to undermine the entire premise of risk pooling by attempting to identify the risks for individuals. (See also information asymmetry; market failure.)

AFDC: see Aid to Families with Dependent Children.

Affirmative Action: A public program that attempts to end discrimination against hiring, admitting and promoting women and minorities in public institutions or private companies that contract with the government. Affirmative action takes two forms. "Classical" affirmative action studies the local population, determines the pool of qualified applicants for a particular public institution or contractor, and asks the organization to hire a cross section of that talent pool. "Set asides" are more proactive, using preferential admissions and hiring to achieve diversity. Set asides are more commonly used when it is difficult to determine the available talent pool, yet minorities appear to be underrepresented anyway.

Agency problem: Also called the "principle-agency problem." This is the problem of making sure that individuals ("agents") who are supposed to represent a group and look after its interests do not use their authority or power to help themselves at the expense of the group. The agency problem exists in virtually all organizations. In the public sector, representatives are supposed to look out after the interests of the districts that elected them. But they often take bribes and raise their perks and pay at the public's expense. In the private sector, CEO's are supposed to look out after the profitability of the company, and attend to the satisfaction and welfare of its customers, stockholders and workers. But CEOs often help themselves to skyrocketing salaries and golden parachutes, even as they downsize their employees and defraud stockholders. Attempts to solve the agency problem include holding elections, tying incentive pay to the welfare of the group or organization, screening agents for good character and personal backgrounds, and setting up a system of regular scrutiny and punishment for direlect behavior. Ultimately, no organization solves its agency problem 100 percent, because the costs of ensuring such agency eventually outweigh the benefits.

Aid to Families with Dependent Children: The anti-poverty program most commonly referred to as "welfare." This federal and state program gives monthly financial assistance to parents (usually single mothers) in need.

Altruism: An unselfish concern for the welfare of others.

Anarchism (mutualist): A proposed socialist economic system calling for businesses to be owned and controlled by employees, not private capitalist individuals. These businesses would then compete on the free market, without a central government. (See also anarchy; anarchism (social); anarcho-syndicalism; libertarianism (left); and socialism. Compare to anarcho-capitalism and libertarianism (right).)

Anarchism (social): A proposed classless, stateless socialist society of directly democratic self-governing communities and workplaces freely united in a confederation by a system of mandated, recallable delegates. Decisions flow from the bottom up and are based upon intensive discussion by those affected by them. Production is for use, not profit, and the community owns and workers control the means of production. Anarchists think that direct democracy within voluntary associations and the abolition of wage slavery is the best way to maximize individual liberty. Also known as libertarian socialism or libertarian communism. (See anarchy; anarcho-syndicalism; libertarianism (left); and socialism. Compare to anarcho-capitalism; libertarianism (right) and social democracy.)

Anarcho-capitalism: A proposed economic system calling for an anarchic society with sovereign individual property rights and a capitalist free market. Any public services that are deemed valuable, such as law enforcement, would be privatized. (See anarchy; Austrian school of economics; capitalism; libertarianism (right) and Objectivism. Compare to anarcho-socialism.)

Anarcho-socialism: A term which broadly refers to anarchism (social) and anarchism (mutualist). Most anarcho-socialists deem the term redundant, however, and prefer to be called "anarchists," not "anarcho-socialists." This is because they believe that the only true anarchy is socialist, and the only true socialism is anarchic. However, it remains a useful term, because it distinguishes them from others who, right or wrong, also consider themselves anarchists and socialists: for example, anarcho-capitalists and social democrats. (See anarchy; anarcho-syndicalism; libertarianism (left); and socialism. Compare to anarcho-capitalism; libertarianism (right) and social democracy.)

Anarcho-syndicalism: A political philosophy that proposes that workers organise into decentralised, self-governing workplace and community organisations to take over and run the means of production and create a left-libertarian society. Heavily influenced by social anarchist ideas. (see anarchy; anarchism (social); Libertarianism (left) and socialism. Compare to anarchism (mutualist).)

Anarchy: 1) In the purest etymological sense, anarchy is a society without rulers, after the Greek word an-archos, meaning "without ruler." It does not mean "without rule," since all societies must have rules in order to function and cooperate well. In an anarchist society, individuals are self-rulers, or at least contribute or agree directly to the rules of their groups. 2) A term of disputed definition among those who consider themselves anarchists. Anarchists who are socialists define anarchy as "A society without state, a government or other forms of hierarchy, and is based upon voluntary cooperation between individuals for their own mutual benefit." The "other forms of hierarchy" mentioned here include private rulers (capitalist owners and bosses). Instead, they advocate worker control and ownership of the workplace. On the other hand, anarcho-capitalists define anarchy as "A society without state or government." They would retain capitalist owners and bosses, arguing that workers are free to contract their labor however they wish on the labor market. Socialists argue that the capitalist definition of anarchy is a giant self-contradiction, since public authority and law are merely privatized, and workers are still coerced and exploited, despite what capitalists claim. As anarcho-socialist Noam Chomsky points out, "There is no human institution that approaches totalitarianism as closely as a business corporation. I mean, power is completely top-down. You can be inside it somewhere and you take orders from above and hand 'em down. Ultimately, it's in the hands of owners and investors." According to this school of thought, the only true anarchy is socialist, never capitalist. (See or compare anarchism (mutualist); anarchism (social); anarcho-capitalism; anarcho-socialism; anarcho-syndicalism; Austrian school of economics; libertarianism (left); libertarianism (right); Objectivism; and socialism.)

Antitrust law: A law that breaks up monopolies, or prevents them from forming. (See also monopoly; oligopoly.)

Asymmetric information: See information asymmetry.

Austrian School of Economics: A forerunner of right libertarian economics, championed by Ludwig von Mises, Carl Menger, F. A. Hayek and Murray Rothbard. Today it is one of many variants of libertarianism, emphasizing free markets, sovereign individual property rights, and freedom of association. The Austrian school differs from mainstream economics in several areas. First, it calls for abolishing the central bank and returning to the gold standard, a move opposed even by most mainstream conservative economists. Second, it would eliminate insurance of bank deposits, allowing bank panics to run their course, to correct malinvestment. Mainstream economists believe the Great Depression is a historical lesson against such a policy. Third, Austrians believe that economic information is best conveyed through prices, not aggregate economic statistics, like the ones for inflation and unemployment. They believe that such statistics can only be used to manage the economy, which they are opposed to. In other words, they believe in a highly individualized information system. Fourth, they believe that mainstream economists are too heavily dependent on mathematical models. Austrians view economics as a soft science, like history, filled with too many intangibles to calculate mathematically. Although Hayek won the Nobel prize in 1974 for a contribution to business cycle theory, mainstream economists largely ignore Austrian economics today -- for example, it is barely mentioned in most introductory economics texts. (See also Libertarianism (right).)

Bicameral legislature: A legislative body that is divided into two chambers. An example is the U.S. Senate and House of Representatives. The rational for a bicameral chamber is to compel compromise between special interest groups, and to slow down the pace of mob rule. The latter point is the subject of an unconfirmed anecdote about George Washington and Thomas Jefferson. Jefferson is supposed to have asked Washington why he agreed to two chambers of Congress. "Why do you pour your coffee into your saucer?" Washington asked. "To cool it," Jefferson replied. "Even so," Washington said, "we pour legislation into the senatorial saucer to cool it." More formally, the longer terms of the Senate (six years, compared to the House's two) insulate Senators from public opinion, and they can afford to make calmer, more rational decisions. This effect was evident in the Gulf War, when Congress voted to give President Bush the authorization to launch an attack of Kuwait. The measure -- supported by 90 percent of the public -- passed in the House by a landslide. But it barely passed in the Senate. Bicameral legislatures have also been heavily criticized for being corrupt, archaic, inefficient and torn by rivalry. (See also conference committee; unicameral government.)

Bill of Rights: 1) The first 10 amendments to the U.S. constitution, establishing individual rights that the federal government may not violate. Originally, however, the constitution did nothing to prevent state and local governments from violating them. States had their own similar, but sometimes different, constitutions protecting individual rights. It wasn't until 1878, with the passage of the 14th amendment, that states were forbidden to "deprive any person of life, liberty or property without due process of law." 2) The British Bill of Rights of 1689, which served as a model for the U.S. Bill of Rights. (See also constitution.)

Business Cycle: The recurrent expansion and contraction of the economy (as measured by the Gross Domestic Product). During an expansion, the nation's productivity grows as more people enter the workforce and productive technology improves. During a contraction, the nation's productivity falls as unemployment rises. The business cycle is aperiodic (irregular), for reasons economists are still debating. No serious economist claims to know the underlying cause of the business cycle, and there is a Nobel prize waiting for the first one who does. Even so, certain features of the business cycle are well understood. Expansions are generally much longer than recessions, because the economy grows in the long run, thanks to constant population growth and improving productive technology. (See also Keynesianism; recession.)

Capital: Wealth. Capital is one of the four requirements for production, the other three being land, labor and enterprise. "Financial capital" refers to money assets; "capital" by itself refers to buildings, machinery, productive technology, inventories, or any other investments like art, wine, or classic automobiles. On a farm, the land itself is not considered capital, but all the improvements to the land -- that is, the farm -- are. In other words, capital is humanly-made material. Another broad distinction is the one between circulating capital and fixed capital. The former consists of raw materials and labor effort that are sold as a product for profit. The latter consists of tools and machinery that yield profits without circulating.

Capital gains: An increase in the value of capital.

Capital gains tax: A tax on the increased value of capital at the moment of sale. Capital gains taxes are not levied between sales, or if a capital asset has lost value.

Capitalism: An economic system in which private individuals or corporations own and invest in the means of production.

Caucus: In party elections, a small neighborhood meeting where citizens meet to discuss issues and elect representatives to the next level of caucuses and conventions. The original purpose of caucuses was to increase involvement at the grassroots level, while ensuring the final ballot was more the result of representative democracy than direct democracy. In practice, however, most people find caucuses difficult to attend, and participation remains minimal. As a result, caucuses tend to attract voters with strong political views who elect extremist candidates. In 1988, for example, Pat Robertson won the Washington Republican Caucus, and Jesse Jackson finished a strong second in the Democratic Caucus. Critics assert this is a recipe for gridlock. Furthermore, a well-financed or well-organized campaign can take advantage of caucuses' small attendance by getting out the vote. The primary system (direct election of candidates) arose earlier this century as a reform to caucuses, but it still has not supplanted it completely. (Compare to primary.)

Central bank: The central monetary authority of a country. Central banks issue currency, control the size of the money supply (through monetary policy), and manage the country's foreign exchange rate reserves as well as the strength of its currency on international markets. (See also Federal Reserve System; monetary policy.)

Chaos theory: A theory describing chaotic systems, such as weather, turbulence, land formation, and fluctuations in populations and economies. More formally, it is the study of nonlinear systems. Scientists have been finding order in what we used to believe was chaos, and chaos in what we used to believe was order. One of the central concept of chaos theory -- fractals -- has obvious if complex applications to economics and political science. (See also fractals.)

Chicago School of Economics: An influential branch of conservative and libertarian economics, based at the University of Chicago. It is a major ideological defender of free markets and capitalism, with a heavy emphasis on mathematical analysis. Milton Friedman boosted the prestige of the Chicago School in the 1960s, with the development of such theories as monetarism and the natural rate of unemployment. He won a Nobel prize for the latter, but has lost mainstream academic support for the former. Nobels have also been awarded to seven other economists from the University of Chicago, such as George Stigler (deregulation theory), Robert Lucas (Rational Expectations), Merton Miller (financial economics), Ronald Coase (Coase Theorem), and Gary Becker (microeconomic applications to non-market behavior). Liberal economists like Edward Herman charge that the relationship between the Nobel Committee and the Chicago School is incestuous -- the more Nobels the Chicago School wins, the more leverage it gains with the Nobel Committee. Indeed, some of Nobel selections have generated academic controversy, which the Committee itself has acknowledged and attempted to defend. For example, it awarded Lucas a Nobel for a theory that, although tremendously influential in the 70s, had lost currency in academia a long time ago, and which Lucas himself no longer works on. Critics also charge that the School's over-emphasis on math fails to ground its analysis in other fields of science, which allows it to prove anything it wants to prove. Conservatives dismiss these criticisms as sour grapes. (See also Coase theorem; monetarism; natural rate of unemployment; Rational Expectations.)

Coase theorem: An economic theorem which attempts to solve the problem of externalities like pollution by specifying who has property rights to previously unowned entities like air or water. The Coase theorem has two starting assumptions. First, property rights must be well-defined. Second, negotiations for polluting rights between polluter and neighbor must be costless (that is, not derailed by huge legal battles or stubborn, expensive negotiations). If these two criteria are met, then the amount of pollution will be efficient and identical no matter who is given property rights to the air or water. Conservatives present this as a private alternative to public regulation. Liberals criticize it for a number of shortcomings, chief among them that it results in more pollution. (See also externality.)

Collectivism: The principle of organized group effort.

Communism: 1) A social and economic system in which all (or nearly all) property is public, not private. That is, resources are shared by everyone. Not to be confused for socialism, which only grants ownership of the means of production to workers. 2) A technically incorrect but widely used term for the system practiced by the Soviet empire. 3) In Marxist ideology, a utopia achieved in the final stage of workers' struggles. The first stage is capitalism, in which the proletariat (workers) are exploited by capitalists (business owners). The second stage would be socialism, or a "dictatorship of the proletariat." Marx envisioned that this stage would be brief. In the final stage -- communism -- society would become so classless and collectivist that the formal state would wither away, and society could spontaneously operate as a collective whole without government. (See also Marxism.)

Conference Committee: The place where select members of the two chambers of a bicameral legislature meet to form a compromise version of their different versions of the same bill. Critics charge that it is the most corrupt feature of a bicameral legislation. The process runs thus: after public debate, both chambers will pass their respective versions of the bill, and then meet in conference committee to hammer out a compromise. During committee, which is often closed to the public, special interests quietly insert their amendments into the bill. Then the compromise bill comes up for a second vote by each chamber. Often, there is almost no debate the second time around, and almost no one reads the contents of the final bill. Legislators simply pass whatever the conference committee has produced. Unicameral government, which is actually what most legislatures around the world use, is designed to avoid this practice. (See also bicameral legislature; unicameral legislature.)

Conservatism: 1) The disposition to preserve tradition and resist change. 2) A political philosophy calling for reduced government and greater individual freedom in the private sector.

Constant dollars: Also called real dollars. These are dollars that have been adjusted for inflation, necessary for comparing the true prices of things across years. For example, your grandfather may remember buying a candy bar for 5 cents back in 1945. Today, the same candy bar costs $1.00. The difference is due to inflation -- after all, it's the same candy bar, and you exchange the same amount of your labor for it. So in constant dollars, candy bars in any year cost the same thing. Constant dollars are expressed in specific benchmark years. For example, economists would say that your grandfather's candy bar costs $1.00 in "1996 dollars," and today's candy bar costs 5 cents in "1945 dollars." Economists devise huge tables to convert consumer prices into constant dollars, called the "Consumer Price Index." (See also current dollars; consumer price index.)

Constitution: A document describing the governing principles of a nation or organization, as well as the rights and responsibilities of individuals. The difference between the constitution and law is only one of degree; the constitution describes very general principles, rights and responsibilities; the law describes highly specific ones.

Consumer Price Index (CPI): A chart that converts consumer prices from any given year into constant dollars. These conversions are based on a typical "market basket" of consumer-purchased goods -- food, appliances, rent, transportation, etc. For example, economists know that a consumers usually spend 15 percent of their income on food and 30 percent on housing, regardless of inflation. They can then compare the prices of things across years to calculate both inflation and the CPI. (See also constant dollars; current dollars.)

Corporate Special Interest System: The pro-corporate lobbying culture that arose in Washington D.C. after the 1975 SUN-PAC decision, which essentially legalized corporate political action committees. Because corporations have more money than other lobbying groups, they quickly came to dominate the political process, forming 67 percent of all PACs and donating 79 percent of all "soft money" to political parties by 1992. (See also lobbying; political action committee.)

Corporate welfare: A somewhat disputed term in politics and economics. Liberals define it as unjustified government subsidies, unjustified tax breaks, or pork-barrel spending given to corporations. The difference between "justified" and "unjustified" depends on the economic benefit of the program. When Eisenhower's Federal Aid Highway Act of 1956 paved the nations with highways, the construction companies that won these contracts were not receiving "corporate welfare" because the program's economic benefits were obvious. But when Congress awards $500,000 to a lobbyist to build an unneeded Lawrence Welk Museum, the result is a waste of both the taxpayers' money and the nation's limited labor and material resources.

Correlation: A mutual relation between two or more things. In a positive correlation, both things increase together. For example, the hotter the weather, the more people go swimming. In a negative correlation, one rises as the other falls. For example, the hotter the weather, the less people wear jackets. A correlation should never be confused for causation. Sometimes the arrow of causality is easy to determine, as in the above examples, where the cause is obviously warmer weather. But sometimes the arrow of causality is difficult to determine. For example, poverty and social problems are correlated, but scholars argue over which causes which. Sometimes correlations form a vicious circle of causality, as when an alcoholic can't keep a job, but joblessness drives an alcoholic to drink. Sometimes correlations are not caused by each other at all, but by yet a third factor. For example, birds flying south are correlated with leaves changing their color, but neither is caused by other; the true cause is the onset of autumn.

CPI: See Consumer Price Index.

Crank: A person whose beliefs lie outside the scientific mainstream, but does not attempt serious or extensive debate with those in the mainstream. Martin Gardner, who invented the term, identified two distinguishing features of a crank. The first is that cranks do not participate in scientific conferences or peer-reviewed journals, but instead write for journals they themselves edit, and speak before groups they themselves founded. Second, they believe that the failure of the scientific community to adopt their beliefs represents widespread stupidity or corruption on behalf of the entire scientific community. Not to be confused with unorthodox scholars who do participate seriously in the formal channels of academic discussion. (See also scientific consensus.)

Creation Science: A school of thought which believes that there is scientific evidence for the literal interpretation of Genesis. This includes a six-day Creation week, a young earth (6,000 to 10,000 years old) and Noah's Flood. Critics charge that it fails as science because its claims are neither predictable nor falsifiable. (See also science; scientific method.)

Current dollars: Also called nominal dollars. These are dollars that represent the price of things for a specific year, unadjusted for inflation. For example, a new car in 1920 might cost $100; today it might cost $20,000. Both figures are expressed in current dollars. Expressed in constant dollars, however, they would be roughly the same price. (See also constant dollars; consumer price index.)

Go to Next Section: D-I
Return to Glossary Home Page