The 007s — Week 13
- Mercantilism: Adam Smith coined the term “mercantile system” to describe the system of political economy that sought to enrich the country by restraining imports and encouraging exports. This system dominated Western European economic thought and policies from the sixteenth to the late eighteenth centuries. The goal of these policies was, supposedly, to achieve a “favorable” balance of trade that would bring gold and silver into the country and also maintain domestic employment.
In contrast to the agricultural system of the physiocrats or the laissez-faire of the nineteenth and early twentieth centuries, the mercantile system served the interests of merchants and producers such as the British East India Company, whose activities were protected or encouraged by the state. The most important economic rationale for mercantilism in the sixteenth century was the consolidation of the regional power centers of the feudal era by large, competitive nation-states.
- Total Factor Productivity: Total factor productivity (TFP) refers to the productivity of all inputs taken together (whole — greater than the sum of parts). TFP is a measure of the output of an industry or economy relative to the size of all of its primary factor inputs. When the growth of a nation’s economic output over time is compared with the growth of its labor force and its capital stock (inputs) it is usually found that the former exceeds the latter. This is due to the growth of TFP, that is, the ability to combine the factors (labor and capital) more effectively over time. This can be due to changes in qualities (more appropriate skills or embedded technologies) or to better methods of organization. TFP represents any effect in total output not accounted for by inputs. It addresses the real driver of output growth, not contributed by growth in productivity or inputs such as capital stock and the labor force. TFP can be interpreted as growth through technological innovation and efficiency achieved by enhanced labor skills and capital management.
- Secular Stagnation: The term “secular stagnation” refers to a state of little or no economic growth — in other words, an environment where the economy is essentially stagnant. “Secular” in this context simply means “long term.” The term was coined by Alvin Hansen in the 1930s, during the Great Depression, and was revived largely by Lawrence Summers. Summers briefly explained his theory of secular stagnation in a 2016 article, “The Age of Secular Stagnation.” In the article, he states, “The economies of the industrial world, in this view, suffer from an imbalance resulting from an increasing propensity to save and a decreasing propensity to invest. The result is that excessive saving acts as a drag on demand, reducing growth and inflation, and the imbalance between savings and investment pulls down real interest rates.”
- Brilliance Bias: Published in the Journal of Experimental Social Psychology, involving 3,618 participants from 78 countries, a study found consistent evidence for an implicit gender-brilliance stereotype favoring men. The participants included both men and women, as well as children between the ages of nine and ten — and 70 percent of them subscribed to the stereotype.
Brilliance bias is the tendency for people to think of ‘brilliance’ as generally a male trait. With fewer women generally recorded in the history books, the brilliant people that come to mind from a young age tend to be men. Careers that are generally understood to require ‘brilliance’ to succeed such as maths, physics, or philosophy, are likely to have fewer women working in them. Read more here.
- Stagflation: Stagflation refers to an economy that is experiencing a simultaneous increase in inflation and stagnation of economic output. Stagflation was first recognized during the 1970s when many developed economies experienced rapid inflation and high unemployment as a result of an oil shock. Economic policymakers across the globe try to avoid stagflation at all costs. With stagflation, a country’s citizens are affected by high rates of inflation and unemployment. High unemployment rates further contribute to the slowdown of a country’s economy, causing the economic growth rate to fluctuate no more than a single percentage point above or below zero.
Since unemployment and inflation are both considered detrimental to one’s economic well-being, their combined value is useful as an indicator of overall economic health.
- Information Cascades: An information cascade occurs when individuals, having observed the actions and possibly payoffs of those ahead of them, take the same action regardless of their own information signals. Informational cascades may realize only a fraction of the potential gains from aggregating the diverse information of many individuals, which helps explain some otherwise puzzling aspects of human and animal behaviour. For example, why do individuals tend to converge on similar behaviour? Why is mass behaviour prone to error and fads? The theory of observational learning, and particularly of information cascades, has much to offer economics and other social sciences.
- Heuristics: Heuristics are mental shortcuts that can facilitate problem-solving and probability judgments. These strategies are generalizations, or rules-of-thumb, reduce cognitive load, and can be effective for making immediate judgments, however, they often result in irrational or inaccurate conclusions. We use heuristics in all sorts of situations. One type of heuristic, the availability heuristic, often occurs when we’re attempting to make judgments about the frequency with which a certain event occurs.
Say, for example, someone asked you whether more tornadoes occur in Kansas or Nebraska. Most of us can easily call to mind an example of a tornado in Kansas: the tornado that whisked Dorothy Gale off to Oz in Frank L. Baum’s The Wizard of Oz. Although it’s fictional, this example comes to us easily. On the other hand, most people have a lot of trouble calling to mind an example of a tornado in Nebraska. This leads us to believe that tornadoes are more common in Kansas than Nebraska.