J - N

Judicial activism: The making of new public policies through the decisions of judges. This can be accomplished by overturning previous court decisions, recently passed laws, or executive branch actions. Critics charge that judicial activism robs power from legislatures. Defenders argue that many laws are vaguely worded, especially when they are the result of legislative compromise, so courts are forced to interpret them in ways that seem activist. (See judicial self-restraint.)

Judicial branch: The courts. The judiciary is the branch that protects citizens from the abuses of other branches of government. (See also executive branch; legislative branch.)

Judicial review: The process of reviewing the laws or actions of the President or Congress for their constitutionality. Judicial review was not originally included in the Constitution, even though the Federalist Papers (#78) forcefully argued for it. But the Constitution left open the door to judicial review, by extending judicial power to "to controversies to which the United States shall be a party." In 1803, in the case Marbury v. Madison, the Supreme Court asserted the right of judicial review, which it has used ever since. Thomas Jefferson was dismayed by this action, which he felt disrupted the separation of powers. But most scholars today take for granted the appropriateness of judicial review. The alternative would be simply to trust the President and Congress to abide by the Constitution -- a notion that hardly enjoys the confidence of history.

Judicial self-restraint: The policy of judges to interpret the law narrowly, allowing the legislative and executive branches to formulate government policy. (Compare to judicial activism.)

Keynesianism: Also called classical or neo-Keynesianism. (Not to be confused for New Keynesianism.) This was the theories of British economist John Maynard Keynes, whose revolutionary theories about monetary and fiscal policy appear to have eradicated the economic depression from modern experience. Keynes advocated using government and the central bank as important tools in solving the Great Depression and ameliorating the business cycle. For economic downturns, he recommended expanding the money supply to inspire consumers to start spending their money again. If the downturn became serious enough, then government should begin massive deficit spending to jump-start the economy. Roosevelt ignored his advice until World War II forced him to begin massive deficit spending on defense. The U.S., like every other nation, emerged from the depression shortly after adopting this policy. (See also business cycle; central bank; New Keynesianism; monetary policy; rational expectations; recession.)

Laffer Curve: The purported relationship between tax rates and tax collections, as graphed by economist Arthur Laffer. Laffer held that when tax rates become too high, tax collections actually fall because people are discouraged from doing taxable activity, or they start cheating on their taxes. Thus, lowering the tax rate would have the paradoxical effect of raising tax collections. Laffer was hardly the first to think of this -- Keynes had voiced similar sentiments -- but Laffer was the first to get the idea publicized, thanks to his friendship with Robert Bartley, an editorialist for the Wall Street Journal. Economists generally agree that something like the Laffer Curve exists, but disagree sharply on how steep it is, or how high taxes have to become to start seeing falling revenues. (See also supply-side economics.)

Laissez-faire: French for "leave it alone" or "let it be." This was the philosophy that government should not interfere with the actions of businessmen. It first appeared with the rise of the Physiocrats in 18th-century France, who were incensed with the regulations of Mercantilism. The 19th century saw the greatest era of laissez-faire in both Europe and America, with substantially lighter government by today's standards. However, laissez-faire waned as the industrial revolution proceeded, and by 1933, it fell discredited in the U.S., replaced by the policies of the New Deal. Modern conservatives have since replaced "laissez-faire" the term with "market economics" or "free enterprise." (See also libertarianism; New Deal.)

Leading economic indicators: Statistics that purportedly indicate a forthcoming change in the economy. The Bureau of Economic Analysis and the Department of Commerce publish dozens of leading economic indicators each month in Business Conditions Digest.

Legislative branch: The branch that debates and votes on the nation's laws. In the U.S., this includes Congress, its supporting staff, the General Accounting Office, the Government Printing Office, and the Library of Congress. (See also executive branch; judicial branch.)

Liberalism: 1) Openness to progress or change. 2) Generosity and willingness to give. 3) In the 18th century, a political philosophy that advocated smaller government and greater individualism, much as modern conservatives do today. Also known as "classical liberalism." 4) In modern times, a political philosophy that advocates greater public support, defense, regulation and promotion of the private sector.

Libertarianism (left): A political philosophy calling for as much self-government for individuals as possible. Opposes all forms of hierarchical authority (particularly those associated with capitalist companies and the state) and social inequality in favour of group direct democracy, individual liberty and social equality. This would be accompanied by either no government or government reduced to a minimal level. (See anarchy; anarchism (social); anarchism (mutualist); anarcho-socialism; anarcho-syndicalism and socialism. Compare to anarcho-capitalism and libertarianism (right).)

Libertarianism (right): A political philosophy calling for very strong or even sovereign property rights for individuals. This would be accompanied by either no government, or government reduced to its minimalist functions: for example, police and military defense. (See also anarchy; anarcho-capitalism; Austrian school of economics; Objectivism. Compare to anarcho-socialism and libertarianism (left).)

Lobbying: The act of arguing one's case before a legislator prior to the passage of a law affecting one's interests. In principle, lobbying should be conducted by argument alone, and available to any citizen of the nation. In the United States, appealing to one's government is a constitutional right. However, in practice, lobbying is conducted by money, usually in the form of campaign contributions. Typically, a donation of $5,000 is needed just to get in through the door of a legislator (what players call "access"). Critics charge the current system is little more than laws passed by bribery. (See also corporate special interest system; special interest group; political action committee.)

Logrolling: Vote-swapping among representatives. Logrolling is named after the lumberjack sport in which two people must cooperate to maintain their balance on a floating log as they spin it with their feet. Logrolling especially occurs when two legislators have a special interest in their own bills but not in each other's -- therefore, vote-swapping is in their interests. Typically, these bills greatly benefit one's home district but spread the costs over the whole population. Examples include military bases, highways, VA hospitals and pork-barrel projects. One way to reduce logrolling is to increase the power of party leaders in the legislature. However, it is not clear that logrolling is bad, in and of itself. When everyone does it, the spread-out costs of everyone else's projects build up in the representative's own district, effectively paying for his own project. Logrolling might be criticized on other grounds, namely, that such spending does not adhere to a well-thought out, well-organized strategic plan.

Macroeconomics: The study of the economy as a whole. Macroeconomists are concerned mostly with national economies and the government policies that affect them. Subjects of study include unemployment, inflation, recessions and recoveries, monetary and fiscal policy, taxation, regulation, public goods, etc. They also study aggregate rather than individual statistics, like national savings, investment and consumption. (Compare to microeconomics.)

Marginal tax rates: The percentage of adjusted gross income paid in taxes -- after deductions, credits, exemptions, etc. In other words, the percentage of the first additional dollar of income which would be paid in income tax. Example: with an annual income of $30,000 a year, your adjusted gross income, after credits and exemptions, might be $25,000. Suppose you pay $3,000 in taxes. The effective tax rate here is 10 percent; the marginal rate is 12 percent. (See also effective tax rate.)

Market failure: An imperfection in a price system that prevents an efficient allocation of resources. Important examples include adverse selection; externality; imperfect competition; information asymmetry; path dependency and public goods. Market failures present a challenge to economists on both the left and the right. Conservatives and libertarians must argue that these failures either don't exist or that there are theorems or other private solutions that will solve them. Liberals must argue that the government is better suited than private actors to correct these problems. (See also perfect competition.)

Marxism: The philosophies and teachings of 19th century economist Karl Marx. Although Marx is credited with the idea of socialism and communism, Marx did not really elaborate much on his utopian government. The vast majority of his writings were critiques of capitalism. However, he viewed the struggle of workers as a continuation of historical forces that would one day lead to communism. This would occur in three stages. The first stage was 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 socialism; communism.)

Mean: Another term for "average." This is determined by adding all the values together and dividing by the number of units. For example, consider three people whose incomes are $100, $500 and $10,000. The average income is $3,533. (That is, 100 + 500 + 10,000 = $10,600, which is divided by three people, coming to $3,533.) Notice that there is room for statistical deception here. No one in this group actually makes $3,533, or even comes close to it. Nor does this average say anything about how unequally income is distributed. If the poverty line were $2,000, then a group with an average income of $3,533 might give us a false impression of prosperity, when in fact two-thirds of it are mired in poverty. (Compare to the Gini index; median; mode; quintile.)

Median: The middle value in a distribution. Consider three people whose incomes are $100, $500 and $10,000. The median income of this group is $500. "Median" is often confused with "average" or "mean," but the average or mean income in the above example would be $3,533. (This is derived by adding the three incomes and dividing by three.) In a distribution with an even number of units, the median is the average of the two middle units. For example, in a distribution of $100, $500, $600 and $10,000, the median is $550. (Compare to median and mode. For measuring inequality, see also the Gini index and quintile.)

Meritocracy: a social system which gives out rewards based on merit or success. (The two are not necessarily synonymous, as in the case of accidentally striking oil.) Meritocracies are created by relaxing regulation. An unrestricted meritocracy is completely without rules -- that is, jungle warfare. A moderated meritocracy still features competition, but with rules establishing fair play and less drastic results. In economics, a moderated meritocracy is one where a percentage of the income of the wealthiest is redistributed back to the middle class and poor.(See also egalitarian society; free market.)

Methodological holism: The theoretical principle that that groups often have traits, behaviors and outcomes that cannot be understood by reducing them to their individual parts. That is, groups consist not only of individuals, but also relationships between individuals. For example, a car is not simply a pile of atoms, although atoms are fundamental units and possess unique individual properties. Those atoms must be shaped into a car, and we must take into account their relationship to each other if we are to explain the traits and functions of a car. (Compare to methodological individualism.)

Methodological individualism: The theoretical principle that all group economic or political activity can be traced back to, and explained by, the behavior of individuals. Even when individuals act on behalf of a group, or as part of a group, they are acting as individuals. Methodological individualists therefore believe that "group behavior" is a false concept. For example, a family may debate on and agree to a budget, but the resulting budget will not be based on "it's" opinions or "it's" agreement, since no such entity exists. The budget is a collection of individual compromises. Even if the budget does not correspond to any single member's first preference, each member nonetheless agreed to the compromise, since the rewards of compromising are still somehow greater than not compromising. (Compare to methodological holism.)

Microeconomics: The study of economics at the household or company level. Microeconomists are mostly concerned with how companies determine prices and budgets, allocate resources, employ labor, distribute incomes, and respond to changes in supply and demand and other market phenomena. (Compare to macroeconomics.)

Mode: The most frequently occurring variable. For example, take five people whose incomes are $100, $100, $500, $600 and $10,000. The mode is $100, because it occurs twice. Notice that the mode hardly tells us the average or even the median income, nor is it useful for describing income inequality. It is also possible to have several modes in the same distribution. For these reasons, it is rarely ever used in economics. It is more useful for describing things like voter intentions. In a nation where 48 percent of the voters favor Democrats, 43 percent favor Republicans, and 9 percent some other party, the mode is "Democrat." (Compare to mean and median. For measuring inequality, see also the Gini index and quintile.)

Monetarism: A theory of monetary policy championed by economist Milton Friedman. Friedman argued that discretionary monetary policy (namely, Keynesianism, or activist government intervention in the money supply) did more harm than good. Under monetarism, the money supply would be held steady, growing only according to a few simple rules. The market would work efficiently around this steady growth, and because it knew exactly how slow and steady the money supply would grow, inflation would be low as well. Monetarism attracted its greatest following in the 1970s and early 80s. The United States nominally switched to monetarism during the years 1979 to 1982, but economists believe this was merely political cover, that it remained Keynesian all along. The U.S. reverted to Keynesianism after 1982, which was followed by the boom years of the 80s. Britain under Margaret Thatcher made a far longer and more serious attempt to make monetarism work, but the experience was a disaster, with tremendous swings in the economic indicators. Thatcher reluctantly abandoned monetarism in 1986. The experience of Britain caused monetarism to lose its following; today, Friedman is the only important economist who remains an unreconstructed monetarist. (See also Keynesianism; monetary policy; business cycle; recession.)

Monetary policy: Those actions by a central bank which expand or contract the money supply. Expanding the money supply tends to reduce unemployment but increase inflation; contracting the money supply does the opposite. In times of recession, expanding the money supply has proven a successful antidote; in fact, this policy has eliminated depressions from the world's economies for six decades now. In the U.S., the Federal Reserve uses three main tools to expand or contract the money supply: buy or sell U.S. debt, change credit restrictions, and change the prime lending rate. (See also central bank; Federal Reserve System; fiscal policy.)

Monopoly: A company that has no rivals in the market for the production of its product. Economists consider monopolies to be a market failure because the lack of competition allows monopolies to raise their prices, lower their product quality, slow down innovations and otherwise exploit customers. Monopolies also prevent others from breaking into the field, for several reasons. First, they can always undercut the price of the newcomer in the short run, until he goes out of business. Second, monopolies own the trade secrets, patents and other technological knowledge to produce the product. In a competitive market, the cross-hiring of personnel allows this information to exchange, but this is significantly harder for start-ups against a monopoly. Third, path dependency has set in -- monopolies, customer habits and other trends are already firmly established. Fourth, monopolies have the financial, legal, political and advertising power to prevent break-ins into the field. On the other hand, monopolies are also bounded by inherent restrictions. Consumers can always find substitutes for the monopolist's product. And monopolies that become too large can be subverted by upstarts exploiting niches that the monopoly does not cover well. (See also antitrust laws; market failure; perfect competition; imperfect competition.)

NAFTA: See North American Free Trade Agreement

Natural law: According to the political right, the law of humankind that would exist in a state of nature, before governments and positive law existed. Natural law describes rights that all humans have, like life, liberty and property. Often synonymous with the law of God. Liberals argue that natural law is a misnomer, that true laws of nature (like gravity) cannot be violated, unlike human rights, which frequently are. (See also rights; social contract.)

Natural monopoly: A monopoly where competition is prevented by the very nature of technology or the market. Examples include electrical, gas and water utilities. The only way these services could see competition would be to install competing electrical lines and water pipes in the neighborhood -- an absurd and wasteful idea. Because private competition is not desirable, public competition suggests itself as an alternative. That is, governments run the utilities publicly, under elected officials competing for votes. Most nations allow their governments to run their natural monopolies directly. The U.S. has a hybrid system, in which private utilities are publicly regulated to avoid monopolistic abuse. Another form of natural monopoly is control over a single natural resource, like bauxite for aluminum and diamonds. Sometimes improved technology reduces the importance of a natural monopoly, as in the case of cable TV reducing the power of the networks, or fiber optics introducing competition to long-distance phone service. (See also monopoly.)

Natural rate of unemployment: Also called the Non-Accelerating-Inflation Rate of Unemployment, or NAIRU. This is the unemployment rate that naturally occurs in an economy when the inflation rate is more or less what the market expects it to be. In the U.S., economists currently calculate the NAIRU to be 5-6 percent. When the unemployment rate starts falling below this, the economy starts to overheat and develops rising inflation. The response of the central bank is then to contract the money supply, which brings both inflation and unemployment back in line. When the unemployment rate climbs above the NAIRU, then the economy slows down and inflation starts to fall. The antidote to this is to expand the money supply. (See business cycle; monetary policy.)

Natural selection: A process in which changes in the environment cause a change in the survival features of survival systems. These systems include organisms in nature, companies in the marketplace, and individuals within firms. In other words, systems with suitable survival features do survive, and systems with unsuitable features don't. A changing environment means that new or different survival features will become more suitable, resulting in a change in the constituency of the surviving population. (Not to the individual members themselves.)

New Deal: 1) The economic and social policies of Franklin Roosevelt, especially referring to the era between 1933 and 1939. The New Deal abandoned the laissez-faire policies of previous Republican administrations, and began massive expansion of public programs to combat the Great Depression. Many important programs like Social Security, a national minimum wage and welfare were introduced under the New Deal. Although the New Deal did much to alleviate the suffering of the poor, it did not solve the Great Depression. Economists attribute that to the deficit Keynesian spending of World War II. 2) The modern welfare state that arose in the U.S. after 1933, commonly referred to as "the New Deal government." In 1995, House Speaker Newt Gingrich promised to overturn this era, believing it had come to an end. However, the fate of his attempted revolution suggests that the New Deal government is here to stay. (See also Keynesianism.)

New Keynesianism: An updated version of Keynesian theory, predominant in academia today. Not to be confused with neo-Keynesianism (classical Keynesianism). In the 1970s and early 80s, conservative economic theories had nearly replaced Keynesianism in academia. Chief among these was rational expectations, which claimed that if the central bank did nothing during a recession, individuals would lower their prices of their own accord, strengthen the dollar, and initiate a recovery. However, the events of the 80s did not bear this out, and rational expectations was gradually abandoned in favor of New Keynesianism. This was the theory that individuals are nearly rational, not perfectly rational, in setting their prices and budgets. For example, people do not review Federal Reserve policy and the dozen leading economic indicators before deciding to reduce their monthly budget by, say, $31.85. People make their best guesses; that is, they are nearly rational. But near rationality often results in price inflexibility. Therefore, when a recession hits, people do not lower their prices, at least for a very long time. Keynesian monetary policy (expanding the money supply) is therefore useful for speeding up recovery from recessions. (See also business cycle; Keynesianism; monetary policy; central bank; rational expectations; recession.)

North American Free Trade Agreement (NAFTA): A trade agreement between the United States, Canada and Mexico purportedly eliminating tariffs and other forms of trade protectionism. NAFTA remains the subject of much controversy. Critics charge that the treaty is filled with countless concessions to special interests protecting their markets. It was also feared that U.S. companies would lay off their highly paid U.S. labor and move their factories to Mexico, where they could pollute freely and exploit labor. Supporters claim that Mexico's economy, at 4 percent the size of the U.S., is too small a market and labor pool to harm or benefit the U.S. Despite the controversy NAFTA has stirred up among the public, however, most mainstream economists firmly support it, including liberal economist Paul Krugman, one of the top trade economists in the world.

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