Free Lunch (27 page)
Authors: David Smith
Rational expectations:
The important concept that says economic actors (people and businesses) learn from the past – they do not make the same mistake twice. Most associated with George Lucas, it demonstrated for example that governments would be unable to fool the public with an inflationary burst of extra state spending.
Real interest rate:
The rate of interest adjusted for inflation. A depositor getting 5 percent interest at a time of 2 percent inflation is doing better than one earning 10 percent interest when inflation is 8 percent.
Real terms:
Any economic variable adjusted for price changes, or inflation. Without such adjustments, comparisons would be meaningless. A 20 percent rise in actual or ‘nominal’ GDP at a time of 20 percent inflation represents zero real growth, while a 3 percent rise at a time of 1 percent inflation is equivalent to 2 percent real growth.
Recession:
Usually defined as two consecutive quarters of falling GDP, although it can apply to any pronounced slowdown. The National Bureau of Economic Research in America, the official recession arbiter, said the US economy experienced a recession in 2001–2 even though GDP did not fall for two successive quarters.
Saving ratio:
The proportion of income saved during a given period. Traditionally, countries such as Japan have had a high saving ratio, while Britain and America have had low saving ratios. In a closed economy, the amount of saving would determine the funds available for investment, although that is not the case where capital flows freely. Saving is usually divided into its discretionary (deliberate decisions to save) and non-discretionary (such as automatic pension contributions) components. Saving is also a net variable, so heavy borrowing by individuals will reduce the saving ratio.
Seasonal adjustment:
Any economic variable adjusted for seasonal variations. Many indicators are adjusted in this way to allow meaningful comparisons between different times of year. Without such adjustment there would always be an apparent surge in consumer spending growth in November and December in anticipation of Christmas. Economists need to know how much of that surge is normal.
Supply-side economics:
The branch of economics concerned with the factors that raise or lower the economy’s long-run or trend growth rate. In the 1980s the ‘supply-siders’, mainly free market economists in America, were concerned with matters such as tax cuts to restore incentives and deregulation to improve the workings of markets. Today, supply-side economics would be regarded as much wider than that, taking in the role of education and training, and ‘active’ labour market measures to encourage greater participation in the job market.
Symmetric target:
A target in which the penalties for undershooting are identical (symmetrical) to those for overshooting. The Bank of England’s 2.5 percent inflation target is symmetrical. If inflation falls below 1.5 percent or rises above 3.5 percent, the governor of the Bank of England has to write a letter of explanation to the Chancellor.
Tax credits:
A form of payment by government to individuals or firms that normally reduces the amount of tax payable. Tax credits also often result in a net payment by the tax authorities to the non-tax-paying recipient.
Transfer payments:
That part of government spending that consists of a transfer from taxpayers to benefit recipients, for example state pensioners or the unemployed.
Underlying inflation:
A measure of inflation adjusted for special or temporary factors. The target measure of inflation used in Britain, the retail prices index excluding mortgage interest payments, is an underlying measure. The target rate is 2.5 percent. One rationale for excluding mortgage payments is that otherwise action by the Bank of England to reduce inflation, raising interest rates, would have the short-term effect of pushing inflation higher.
Unemployment rate:
The percentage of eligible people who are not in work. Not as easy as it sounds. In Britain one measure of eligibility (the claimant count) is based on entitlement to benefit, the jobseekers’ allowance, while another, the International Labour Office measure, counts all those who want to work, whether entitled to benefit or not.
Wealth:
The stock of assets owned by, say, an individual, as distinct from income, which is the flow of money coming in each year. To the extent it is not spent, income adds to wealth.
Economics, as I hope this book has demonstrated, is a living subject. There is a wealth of information, much of it good, in the newspapers, including of course the
Sunday Times
,
www.sunday-times.co.uk
,
The Times
,
www.the-times.co.uk
, the
Financial Times
,
www.ft.com
and the
Guardian
,
www.guardian.co.uk
, and in weekly magazines such as the
Economist
,
www.economist.com
, subscription-only at the time of writing. The Internet is also a wonderful source including, in Britain, the Bank of England,
www.bankofengland.co.uk
, the Treasury,
www.hm-treasury.gov.uk
, the Office for National Statistics,
www.statistics.gov.uk
and organizations such as the Institute for Fiscal Studies,
www.ifs.org.uk
, the Royal Economic Society,
www.res.org.uk
, as well as my own site,
www.economicsuk.com
. Internationally, the Organisation for Economic Co-operation and Development,
www.oecd.org
, the International Monetary Fund,
www.imf.org
, the European Central Bank,
www.ecb.int
and America’s
www.economy.com
are all excellent resources.
There is a generous supply of books on economics, some of them very good, some quite hard work. Rather than litter this book with references, which serve only to clutter up the text, I decided to keep some recommendations until the end, which include those works I have referred to. Starting with the history of economic thought, readers have quite a choice. William Barber’s
A History of Economic Thought
(Penguin) is accessible, while Paul Strathern’s
Dr Strangelove’s Game, A Brief History of Economic Genius
(Hamish Hamilton) is quirky, informative and entertaining.
The Making of Modern Economics
by Mark Skousen (M. E. Sharpe) is full of anecdote, photographs of the great economists – and some of the not so great – and has a wonderfully light touch. Harder, but useful for serious students are Eric Roll’s
A History of Economic Thought
(Faber & Faber) and Mark Blaug’s
The History of Economic Thought
(Edward Elgar).
The lives of the great economists, as well as their original works, always repay reading. Various edited paperback versions of Adam Smith’s
The Wealth of Nations
are in print, including one from Penguin, while Ian Simpson Ross’s
The Life of Adam Smith
(Clarendon Press) tells the story of Smith’s life. John Maynard Keynes merited a three-volume biography, by Robert Skidelsky: volume one is
Hopes Betrayed, 1883–1920
, volume two is
The Economist as Saviour, 1920–37
, and the final volume is
Fighting for Britain, 1937–46
. All are published by Macmillan. Keynes’s
The General Theory of Employment, Interest and Money
(Prometheus Books) is in print. Two other biographies are worth mentioning: Francis Wheen’s
Karl Marx
(Fourth Estate) is a good read as, coming up to date, is Sylvia Nasar’s story of the remarkable life of John Nash,
A Beautiful Mind
(Faber & Faber).
The route to economic understanding is often through economic history. Eric Hobsbawm’s
Industry and Empire
(Penguin), an economic history of Britain, has always been a favourite of mine
. Sterling, the Rise and Fall of a Currency
(Penguin), by Nicholas Mayhew, tells the pound’s often inglorious story. On a grander scale,
The Wealth and Poverty of Nations
by David Landes (Abacus) is excellent. As for modern UK economic history, Geoffrey Owen’s
From Empire to Europe
(HarperCollins) describes post-war British economy from an industrial perspective. Two books of mine,
The Rise and Fall of Monetarism
and
From Boom to Bust
, both originally published by Penguin, do so from the perspective of economic policy. Anybody who has difficulty obtaining these should contact me and we will try to get a reprint organized. The policy perspective on economics has also been provided by some of those who have witnessed it at first hand. Nigel Lawson’s
The View from No.11
(Corgi) is a great account of the Thatcher years and of how economic policy works in practice. Coming right up to date,
Reforming Britain’s Economic and Financial Policy
(Palgrave), written by the Treasury and edited by Ed Balls and Gus O’Donnell, Gordon Brown’s most senior lieutenants, is an account of economic policy changes since 1997. A fun account of different Chancellors since 1945 is provided by Richard Holt in
Second Among Equals
(Profile Books). David Lipsey’s
The Secret Treasury
(Viking) is informative, but in a more buttoned-up way.
On the subject of policy,
Both Sides of the Coin
, by James Forder and Christopher Huhne (Profile Books), is a good example of two economists engaged in debate on a key issue, UK membership of the euro. My own
Will Europe Work?
(Profile Books) looks at the euro issue from the perspective of optimal currency areas.
Economists who write accessibly are still in short supply, particularly in Britain. We do not have a British Paul Krugman, whose books
Peddling Prosperity
(W. W. Norton) and
The Accidental Theorist
(Penguin) debunk from a position of great knowledge. I also like Steven Landsburg’s
The Armchair Economist
(Simon & Schuster).
Students of economics are used to bulky tomes which could easily be sold by weight. Samuelson’s
Economics
(McGraw-Hill) is still in print, the latest edition being co-written with William Nordhaus.
Economics
(McGraw-Hill) by David Begg, Stanley Fischer and Rudiger Dornbusch is a set text on many courses. A relatively new book,
Macroeconomics, Understanding the Wealth of Nations
(John Wiley & Sons), by David Miles and Andrew Scott, is rather good. Many of the existing textbooks will be given a run for their money by a new one,
Principles of Economics
, by Paul Krugman and Robin Wells, published by Worth.
Acknowledgements
This book is the result of conversations, arguments and lunches over many years, with economists too numerous to mention. Their help, and, going back a little further, that of my teachers, is gratefully acknowledged. It is often, in addition, the questions and comments of non-economists, particularly readers, that make you think and encourage delving into new areas. As always, I am grateful for this dialogue, these days mainly via email. At Profile Books, my thanks to Andrew Franklin, Kate Griffin and their colleagues for their help and support. Andrew and I first worked together on a book nearly two decades ago, and he is as energetic and enthusiastic now as he was then. At home, my thanks as always to Jane, Richard, Thomas, Emily and Elizabeth. I hope, in return, this book is of some help to them.
