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Welcome to the SwiftEconomics.com Glossary! Each word will come to life using witty jokes, satire, and colorful examples. The glossary is meant to amuse and educate; not to be traditional or academic. The SwiftEconomics.com team wants to hammer home a few vital ideas throughout the vocabulary lesson. For example, keep an eye on asymmetric information’s effect on health insurance. Please share the SwiftEconomics.com Glossary with colleagues, friends, and family!

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Capital

A reference to money by entrepreneurs and business people. Also a type of “goodwill” firms, organizations, and individuals build up over time. Political capital earned over time by a politician can assist in veering around future indiscretions and mistakes. Social capital is “goodwill” and trust built up between all members of an economy. The rule and protection of law along with virtuous members of society make any transaction easier and create new economic activity.


Capital Gains

The richest people in the world make sure the bulk of their income is in the form of capital gains rather than ordinary income. Cap gains are the profits earned from the sale of an asset such as stock or real estate.

Ordinary income is the W2 tax form ordinary workers fill out each April. Capital Gains are taxed at a lower rate than ordinary income in the United States.

When rich people back politicians who propose income tax increases, this likely doesn’t bother them as much because they’re receiving their cash through capital gains anyway.

This is one of the least publicized facts when candidates assemble their celebrity dream team of support.


Capitalism

All quiet on the Western front! An economic system delivering greater prosperity to more people than any other system dreamed up by mankind. It rests on the principle of private ownership. Anyone can own assets and are entitled to earn a return on their capital at risk.


Cartel

Colluding ruffians. A drug cartel will collude with all major drug distributors to control a market. A drug lord may kill off uncooperative people in their way but at least work towards maximizing the cost of the drugs through fixing prices and controlling output. The OPEC cartel is constantly controlling supply of oil to maximize barrel prices.


Central Bank

The Federal Reserve in the United States. A country’s central bank controls monetary policy. Monetary policy greatly influences the inflation rate, and thus the value of citizen’s money.


Ceteris Paribus

A la “Carpe diem,” Latin phrases are the coolest. The Van Gogh of languages, Latin clearly wasn’t appreciated until it was gone. Meaning “other things being equal,” ceteris paribus helps justify why economists are wrong so often. An economist might say: “for a normal good, a decrease in price will increase the quantity demanded, ceteris paribus.” They press pause on the rest of the economy to say quantity demanded increases when prices are cut. But if it doesn’t happen, they can point back in hindsight and say unemployment rose 3.2%. So there!


Charity

Some may be in it for the tax write-offs but still others actually enjoy charitable giving. Altruism is one of the many elements making up a person’s utility function. Classical economics assumes “rational expectations” in all of its theories. Giving money away for nothing may not be interpreted as rational.

Behavioural economics and neuroeconomics bring other explanations to the table. Behaviorally, someone could feel social pressure to give to charity. In neuroeconomics the brain is hooked up to PET scan machines. Voluntary giving sets off the brain in much the same way as sex; many of the same areas of the brain light up…it’s like the fourth of July.


Collateral

Any home with a mortgage is the collateral for that mortgage. In the event people do not meet the obligations of the loan and stop making payments, collateral is collected which generally meets or exceeds the value of the loan. Collateral is a lender’s safety net.


Collusion

When two or more economic agents create an evil coalition to control pricing and limit output. If two companies control a market, they’re operating in an oligopoly. An oligopolist can end market competition through collusion.


Chicago School

Free market fans. If an alum from the University of Chicago had a child with an alum of Austrian Economics, you’d have a market liberalizing machine. The Chicago School stacks Nobel Prizes in their halls like UCLA does NCAA basketball titles. They believe in low inflation and minimal government intervention. Some Chicago economists would probably tell the government to take a permanent hike.


Coalition

A harmonic convergence of the highest order… of self-interests. An individual, firm, or government forms such an alliance to maximize their happiness (utility in econ lingo). Firms may be interested in maximizing revenue and profits, like McDonalds showing up in every Wal-Mart. Governments may decide they want a free trade agreement a la NAFTA. Two guys out on the town, one broke and the other meeting up with a crush, might form a wing-man coalition; one working towards reeling in their crush, the other getting free drinks all night.


Commodity

A product that differs very little no matter who produces it. Compared to other products like clothing, a commodity is fairly interchangeable with itself. Oil, electricity, vegetables, and precious metals are examples of commodities.


Communism

Marxists unite! Hello comrade! Communism is a stateless society articulated by Karl Marx. The means of production are shared amongst all people because the need for a state “withers away.” Private ownership does not exist and everyone gets along in this Utopian paradise. Speaking of Utopia, Thomas More wrote of such a society in the 16th century but rulers show up in his vision. More included common ownership but the classless element was missing. In More’s assessment, rulers could distribute property based on reason. The fictional island paradise resembles more of a socialist state.

Marx believed that capitalism sows the seeds of its own destruction. He felt that labor is the only commodity that creates more use value than exchange value. In other words, workers spend more time in the factories than required to keep them alive at a subsistence wage (lowest livable wage). They work ten hours when it only takes six to produce the food and shelter needed to live. Marx believed capitalists exploit the surplus labor and predicted a “workers revolution” against moneybags.

Marx felt that capitalists would swallow each other over time until a working class proletariat army outnumbered them and revolted. The workers would then proceed to take the factories and tools from the capitalists as well as the skills learned in the capitalist system to move forward into a socialist state. In a currency-free society, products and services would be freely produced and distributed “from each according to his ability, to each according to his needs.”


Comparative Advantage

David Ricardo, a born Englishman of Jewish and Portuguese descent, recognized that specialization exists. As an influential classical economist, Ricardo wrote about comparative advantage.

Somebody is the best at everything. For my taste, Michael Jordan at basketball, Tiger Woods at golf and Lance Armstrong at being athletically phenomenal. Same goes for producing products and services. A country, organization or individual can produce a product or service at a lower marginal cost compared to another. This is one reason why trade is beneficial. If each country produces what they’re best at (aka most efficient at), and trades with one another, standard of living is maximized for all.

Compare to absolute advantage.


Competition

The motor that makes democracy and capitalism go round. Through creative destruction, competing individuals and firms produce better results in an increasingly efficient manner. Creative destruction allows human’s to get what they demand: the best ideas, the best technology, the best products and services, the best government.

The closer a market inches toward pure competition, which is likely unattainable, the lower prices will likely be.


Concentration

The key to peak performance and getting in “the zone”…especially for a few firms dominating an industry. When markets are in the oligopoly zone, concentration has occurred. Do you concur? Lack of competition can help explain this phenomenon. First-mover advantage could play a significant role in a particular industry as well as high barrier costs of entry for new firms.


Consumer Confidence

Somewhere a Michigan Man is measuring consumer confidence. Every time a consumer stops spending, a Michigan Man bursts into tears; could be Les Myles, Bo Schembechler, or more likely, a graduate student in the UM econ department.

A consumer confidence rating reflects how bright or dismal a person sees their economic future. The University of Michigan runs the most prominent consumer sentiment index for the U.S. It is a way to help economists make predictions about future economic growth.


Consumption

Teachers teach, runners run, and consumers consume. Consumption makes up 70% of the U.S. economy and is reflected in GDP figures. The problem for the U.S. is a consumption economy is consuming products made by foreign economies. Producers flock to countries with cheap workers, cheap real estate, and low regulation. Why wouldn’t they? The global supply chain is such that products can be made anywhere and shipped anywhere within days.

Don’t confuse cheap workers with inferior. Countries like India are producing millions of highly educated, highly motivated workers looking to grab a piece of the capitalist dream.


Contagion

Get your favorite flu medicine ready. You’re about to catch a cold. Contagions are an economic disease that moves from one host to another. The same economic problems move from one economy to another, infecting all in its path. Sounds like a bad sci-fi script but it happens. What is the common denominator between infected economies? People. Often contagions are caused by asset bubbles and government policy.


Corruption

A key component to the deterioration of trust. Without trust economies do not function as well. Comparative studies show GDP growth rates and capital investment are lower in economies with greater violence, government oppression, and crime. Corruption by entrepreneurs, capitalist fat cats, government officials, and everyday citizens cause this damage, usually to line their own pockets.


Cost-Benefit Analysis

With any action, try running a cost-benefit analysis first. In good faith they are the ultimate attempt to account for all costs and benefits associated with a choice. When benefits exceed costs, move forward with the decision. Such an analysis isn’t always easy. Some things are hard to value, like a human life. Externalities can be hard to fully account for. These include impacts on people and places not directly involved in a decision. Beware those who use cost-benefit analyses to justify a policy or action. CBA’s can easily be manipulated and are almost never complete snapshots.


Creative Destruction

It’s the Serengeti plane for ideas. Tom Cruise’s hit-man character in Collateral knew the value of creative destruction:

Vincent: Okay, look, here’s the deal. Man, you were gonna drive me around tonight, never be the wiser, but El Gordo got in front of a window, did his high dive, we’re into Plan B. Still breathing? Now we gotta make the best of it, improvise, adapt to the environment, Darwin, shit happens, I Ching, whatever man, we gotta roll with it.

The marketplace of ideas is a competitive place. Followers of creative destruction say that failure is good because better ideas triumph. These better ideas become new and more efficient technology, alternative energy, products, cures for deadly disease, and anything else that is possible. In a capitalist system, venture capital must fund these ideas, primarily the ones that look more and more promising. But, capital must be lost in the ideas that stagnate or fail.


Credit Creation

Very few people have every component necessary to create a successful business: great ideas that people demand, the entrepreneurial sense to build and manage a business, the desire to subject themselves to such work, and the capital to get the project off the ground and continue running. Most of the time, a person has only one or two of these capacities. Credit creation describes all loan activity; capital costs money, too. Businesses need start-up capital and often short-term loans to meet operating expenses such as employee wages.

Money itself is actually created out of debt. When the U.S. Treasury prints new money, they exchange Treasury notes (debt contract) for the new cash with the Federal government. The government is actually promising to pay back the Treasury note. As a popular documentary, Zeitgeist, points out, money = debt.

Lending institutions have reserve requirements. In the case of the U.S. banking system, a bank must hold 10% of their total cash pool in reserve. The remaining 90% can be used for new credit creation.

Keep in mind that over 95% of the total money supply is electronic; numbers dancing on computer screens. When a bank gives a car loan or a home equity line of credit, they are moving numbers around, not physical money. They’re allowed to move 90% of their total money pool around into new loan contracts for the public. So, if the Bank of Swift had $100 worth of deposits, it could give $90 of loans out. But the $90 doesn’t come out of the $100 of deposits. It gets created out of thin air and tacked on top of the original $100. Now, the money supply has increased $90. It’s easy to do when money is digital.

Credit creation for business is a huge reason why the government TARP (Troubled Assets Relief Program, a taxpayer-funded bailout for large financial firms like JP Morgan Chase and AIG) program was rushed onto the public in 2008. If businesses are unable to get short-term loans from the financial system to meet their obligations, they cannot survive.

If anything about the “credit creation” description seems unsustainable and shady, welcome to a large and growing group of concerned individuals.


Credit Crunch

Banks don’t have to lend. They’ll gladly hold your deposits and deny your credit applications. If every depositor came in on the same day and pulled all of their money out, a bank wouldn’t have the physical cash to meet the demands. Banks are owned by entrepreneurs and entrepreneurs get nervous, too. Risk averse banks cause credit crunches and sometimes for good reason.

If your bank was rumored to be insolvent and failing, you’d rush down and get your money out, right? Some people wouldn’t just sit and wait for FDIC insurance to recoup their losses. In a bank run, people at other banks would likely rush and pull their money out, too in a mass contagion. Over 95% of the money supply is electronic and the physical cash doesn’t even exist. There are not enough bills to meet everybody’s bank account bottom lines.


Cronyism

The good ole boy network; lots of back scratching going on between cronies. When cronies control huge economic resources and are corrupt, big problems arise. In economics it’s referred to as inefficient but others have a few four-letter words to describe the situation.


Crowding Out

When the people who run the DMV attempt to engage in economic dealings. If a state tries to do it, private industry probably won’t.

In neuroeconomics, pleasure centers in people’s brains light up when they give voluntarily. Some of the same pleasure centers that illuminate during sex. It could be nature, it could be social conditioning, but people are altruistic. If a government decided not to pay for health care, or even drastically reduce its expenditures, how would the private sector respond? If the government shift was in sync with charitable groups publicizing the move and requesting donations for medical needs, there’s no telling how much capital could be raised. Literally, there is no telling; people understand they are taxed for society’s medical needs and the state has inserted itself into health care as a solution.


Currency Peg

A government decree that their nation’s currency will move in concert with another nation’s currency. For example, the Argentine peso is pegged to the U.S. dollar. The gap between the two currency’s exchange rate value will be sustained and Argentina will not pursue their own monetary policy beyond maintaining the current exchange rate.

The U.S. dollar has long been the peg for most currencies. Prior to 1971, the dollar was pegged to gold, until the Bretton Woods monetary system collapsed.

A currency peg can provide greater stability for a country’s currency and help trade relations with whom they’re pegged to.

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