Glossary

These definitions are offered in the attempt to explain some of the more significant economic terms in the light of the subjective value, marginal utility, theory of economics, on which the defense of a free and unhampered market must rest. Anyone interested in more detailed explanations of the meaning of these and other economic terms should find it helpful to refer to Mises Made Easier: A Glossary for Ludwig von Mises’ HUMAN ACTION by Percy L. Greaves, Jr. (Dobbs Ferry, N.Y. 10522: Free Market Books, P. O. 298, 1974).

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Action—the purposive attempt on the part of an individual to relieve a “felt uneasiness” or dissatisfaction, to attain a goal or end, to acquire economic goods, to satisfy economic wants or needs. Three conditions necessarily precede action: (a) some “felt uneasiness,” (b) an idea concerning a preferred situation, and (c) the hope or expectation that purposive action will have some chance of success. Three essentials must be present to carry out an action: (a) a plan, (b) time and (c) resources. Several factors may interfere to obstruct or hamper an individual’s action from having the results intended: (a) accidents, (b) natural phenomena, (c) the actions of other persons, (d) changes due to the passage of time and (e) mistakes.

“Administered price”—a term which carries the implication that a large-scale producer can fix almost any high price per unit he chooses for his output and maintain it in spite of the wishes of consumers. The fact is, however, that no seller can “administer” prices on a free market. He can only ask and hope consumers will pay. If consumers refuse to pay what he asks, he must either come down in his price per unit or make fewer, if any, sales.

Advertising—the act or process of publicizing or furnishing information about a good or service with a view to persuading potential customers to buy. Advertising is often criticized for being unnecessary, wasteful, misleading, in bad taste and unconcerned with the interests of consumers. Criticism may be justified in some cases. However, advertising a product is really a necessary step in the process of its production, i.e., in transforming raw materials into a completely finished product in the hands of its final consumer.

Aggregate—the sum, total, or composite of many parts; thus the term “aggregate economics” is used to describe the field of study which deals with statistics based on the activities of large numbers of persons, groups, collectives, etc. See “Macro-economics.”

Agricultural economy—a society in which most of the people are farmers, relying primarily on agricultural production to obtain the things they want and need to consume or to trade.

Ancient civilizations—the early cultural and economic societies based on considerably more specialization and division of labor than the much earlier primitive societies (see below). In this syllabus we shall refer primarily to the civilizations centered around the Mediterranean, from which Western culture arose—the Egyptian, Babylonian, Assyrian, Phoenician, Cretan, Greek and Roman. These ancient civilizations were “Status societies” (see below).

Antitrust legislation—laws intended to inhibit corporations and persons engaged in interstate commerce from taking actions which the Federal Trade Commission or the courts may interpret as “tending to create a monopoly,” “lessen competition” or lead to “restraint of trade.”

A Posteriori knowledge—something learned; information or data acquired from experience, experiment, observation and/or historical study.

A Priori knowledge—something we know “instinctively,” inherently, innately, without consciously having to learn it. The a priori categories of knowledge are:

1. Regularity 4. Time

2. Logic 5. Change

3. Causality 6. Value

Assets—objects (material or immaterial) which have value to someone. In business parlance, the word assets normally refers to objects that have a market value which may be calculated in terms of money.

Austrian School of Economics—the set of economic theories which explain economic phenomena logically as the outcome of purposive actions by individuals. The method of “Austrian” economists is to use logic to reason from basic a priori assumptions. Their subject matter is purposive human action; they explain every economic phenomenon as the outcome of the actions and ideas of individuals. The Austrian School of Economics, so-called because its founders and, until very recently, its leading spokesmen were born in the old Austro-Hungarian Empire, is the marginal utility, subjective value “school” of economics.

Autarky—an economically, self-sufficient economy. In an autarky, the inhabitants produce within their own geographical borders essentially all the goods and services they consume.

Automation—a fairly new term for mechanization, i.e., the automatic performance of an operation using machines or tools created by men but which, once produced by human beings, need only be set in operation by them to function mechanically—unless and until they break down. The development and application of tools, technology and other labor-saving devices made possible by savings and investment, arising out of specialization and the division of labor. The use of technically-sophisticated equipment that operates almost automatically.

Balance of payments—a statement of accounts, balance sheet, listing in monetary terms, an individuals, firm’s, social unit’s, legal entity’s or nation’s total debts and total credits, for a certain period of time. Accounting procedures are such that a balance sheet always balances—total debits and total credits are always equal. A nation’s balance of payments is the composite of the individual balances of payments of all its inhabitants. Because every individual sees to his own personal receipts and expenditures, there is no need to fear a oneway flow in, or out of, the country of either cash or goods—unless some outside forces interfere to prevent individuals from acting on their own best judgment and personal preferences.

Balance of trade—a statement giving the estimated monetary value of an individual’s, firm’s, social unit’s, legal entity’s or nation’s total exports and imports of goods, services and/or money for a certain period of time. A nation’s balance of trade is the composite of the individual balances of trade of all its inhabitants. The balance of trade, unlike the balance of payments, need not balance at all times. When money savings are being accumulated, cash income will exceed outgo; when they are spent, cash outgo will exceed income. Mercantilists (see below) consider a nation’s balance of trade favorable if goods are being shipped out of a country and gold and silver coming in; thus they advocate protectionist government programs to restrict imports of goods.

Balance sheet—a statement of the assets, liabilities and net worth of an individual or a business entity, giving the estimated monetary value of each item as of a specific date. Assets are traditionally listed on the left side of a page, liabilities and net worth on the right. The greater the estimated value of the assets, as compared with that of the liabilities, the more valuable is the property considered to be—and the greater is its net worth or the equity of its owners. And vice versa.

Banknote—a bank’s note or promise-to-pay something, usually gold, silver or some other form of money. Banknotes originated as “warehouse receipts” issued as evidence of gold, silver or some other commodity left on deposit by the owner for storage and safekeeping—by the bank, as warehouse custodian—for the owner’s account and available for redemption as agreed upon by holders of the notes. As banknotes came into frequent use in trade, without being returned to the bank (warehouse) for redemption, the connection between the banknote itself and the bank’s promise to deliver something tangible was gradually forgotten. Banknotes themselves, especially those put out by a government’s legally-privileged “Central bank of issue” (see below), came to be considered money, equal to and as good as the commodity it represented, especially when given status as “Legal tender” (see below).

Banks, banking—fundamentally banks are merely depositories, warehouses for storage and safekeeping of other people’s money. In the course of fulfilling this role banks usually have substantial funds on hand in their vaults, so that they have traditionally sought to combine their warehousing function with moneylending.

Barter—commodity-for-commodity trade. See “Direct exchange” (below).

Bond—an IOU or promise to repay money borrowed. These pledges, IOUs or promissory notes are frequently traded, i.e., bought and sold, on the market. When the loan falls due, the borrower’s obligation is always to repay the money borrowed to whoever owns tide to the bond at that time.

Bureaucracy—the system any government uses to administer its various activities. Any government, whether limited, totalitarian or interventionist employs “bureaucrats.” The government administrators or bureaucrats are permitted little, if any, discretion but must comply with procedures prescribed in the legislation setting up the programs they administer and defining their duties.

Buyer—it is customary to speak of a trader who gives money in exchange for some other good or service as a “buyer.” In this sense, a buyer is contrasted with a seller.

Capitalism—the economic system based on private property, including the private ownership of the factors of production. Because property under capitalism is private, its owners may risk it in trying out their new ideas. Thus, capitalism is the only economic system conducive to entrepreneurial experimentation, free and open competition, the accumulation of capitalist savings, the improvement of tools and the development of mass production. Capitalism, with private ownership and control of the factors of production, contrasts with (a) socialism or communism and (b) various forms of interventionism on the basis of the way property is owned and controlled.

Capitalist savings—savings in the form of “Producers’ goods” (see below)—raw materials, tools, machines, building, equipment or anything else which is intended—not for consumption directly—but for use in some process of production.

Cartel—a monopolistic combination of domestic producers, made feasible by government protection permitting it to restrict total output and/or sales within the economy so as to charge a monopoly price. (See below). A cartel can come into existence only if the government hampers imports, so that the cartel members are protected from foreign competition. Under a domestic cartel agreement, every member is assigned a definite production quota, those members who restrict production being compensated by the other cartel members according to a definite formula. “Surpluses” produced by cartel members are often disposed of abroad at lower prices. Cartels differ from duopolies and oligopolies (see below) in their greater formality and their being legally sanctioned and protected.

Cash holding—a sum of money an individual keeps on hand so as to be prepared for any expenses that may arise requiring cash payment. The cash holding any particular person will want to have varies in size from time to time, place to place and situation to situation. Everyone continually adjusts the size of his or her cash holding according to the situation. Many persons let their cash holdings decline after pay day, for instance, until another paycheck may be cashed to replenish it. Most persons increase their cash holdings when traveling. In today’s money economy few persons permit their cash holdings to decline to zero and remain there for any length of time. To increase a person’s cash holding, he or she sells for cash some good or service (labor) at his disposal; to reduce his cash holding, he or she spends or gives money away.

Central Bank of Issue—a legally-privileged bank, authorized by the government to issue banknotes, which are usually declared legal tender for payment of debts within the nation’s borders.

Chicago School of Economics—a theoretical school, so named because many of its spokesmen have been associated with the University of Chicago. This “school” is young, having developed as a “school” since the 1920s. Representatives of this “school” attempt to prove theory with statistics. Although they favor many free market ideas, they use statistics as the basis for advocating political reform (the negative income tax, manipulation of the quantity of money and various kinds of government regulations).

Classical School of Economics—a school of thought developed in the 18th and early 19th centuries by thinkers and writers who were among die first to describe business, commerce and market operations in some detail. The philosophy and teachings of its most important representatives laid the basis for free enterprise and the development of limited constitutional government. Yet one of its theories, the fallacious labor theory of value, was taken over by Karl Marx and used as the basis for his theory of communism, the very opposite of free enterprise and limited government.

Closed shop—a business enterprise which has an agreement with a labor union (see below) requiring that only persons who already hold membership in certain unions may be hired. Closed shops are contrasted with (a) open shops and (b) union shops (see below).

Coin clipping or coin debasement—processes by which the metallic content of coins is reduced by (1) paring them down in size (clipping) or (2) lowering the ratio of the precious metals in the alloys from which they are made (debasement). In olden times when metallic coins played a significant role as money in the economy, governments clipped and debased coins so as to obtain new stocks of the precious metals from which they could fabricate additional coins to spend for their own accounts. This was their method of spending more than they collected in taxes. Each of the clipped, debased or smaller new coins was legally designated to represent the same nominal denominations as their larger or metallically purer predecessors. Coin clipping and debasement are forms of Inflation (see below).

Collective bargaining—negotiations between an employer’s representatives and representatives of the firm’s employees’ duly authorized unions—on behalf of all the workers under that union’s jurisdiction—to try to reach agreement with respect to wages, hours of work, and other conditions of employment. Bargaining effectively precludes individual workers from bargaining personally with their employer or his representatives.

Command society—a community of persons whose actions are controlled and regulated in many respects by officials in authority. Individuals in a command society are not free to pursue their own personal ideas, preferences, choices, values, ends, goals. A command society contrasts with a free market or contract society, where private property is protected and interpersonal relationships are the outcomes of voluntary, peaceful cooperation, exchanges and contractual agreements. A command society is also, inevitably, a status society.

Communism—the term selected by Karl Marx and his friend, Friedrich Engels, to describe the economic and political doctrines they were advocating. A theoretical economic system based on the ideas of Marx and asserted by Lenin to be the ideal toward which the Russian state was aiming. Under communism all property was to be owned and controlled by the people in common and/or local or central government. Because it is physically impossible to do away with private ownership and control of what a person actually consumes (eats up or wears out) the significance of communism arises out of the fact that private persons are not free to own, buy, sell, trade, use or control factors of production. In theory, under communism there would be no markets, no prices, no money. Both production and distribution would be determined by government officials. Everyone would contribute to the general production “according to ability” and receive “according to need.” Such a system can never be put into practice on any substantial scale. At-tempts to do so must always lead to dictatorship or anarchy and chaos.

Comparative advantage—a theory developed and applied specifically to international trade by the noted English

Classical economist, David Ricardo (1772-1823). Ricardo explained that trade is advantageous to both parties, even though one may be superior in every field of production and the other superior in none. The resources and talents of the two parties may differ and dovetail so that each enjoys a comparative advantage in a different field. The superior producer may have an absolute advantage in every field, but a comparative advantage only in those fields in which he enjoys super-superior productivity. The inferior producer may have an absolute advantage in no field but, nevertheless, he can have a comparative advantage in those fields in which the superior producer’s productivity is not so pronounced.

Competition—the process in the system of social cooperation by means of which everyone strives to improve his personal situation. In the market economy producers compete by trying to please consumers better; sellers compete by offering better and/or cheaper goods and services; buyers compete by bidding higher prices. As a result, competition in the free market helps to spur production and increase the stocks of goods and services available. Competition on the market contrasts sharply with biological competition in nature where plants and animals struggle with one another for shares of the limited resources available in order to be able to survive.

Conglomerate—an aggregate; an accumulation of many units to form a new entity. This term has only recently been applied in economics to describe a specific type of business organization created by the merger of several, formerly independent and usually diverse corporations. The formation of conglomerates has become economically worthwhile in recent years primarily because of certain provisions in the tax laws. The 19th century trusts (see below), similar in some respects, usually engaged in the same or similar branches of production, while the interests of conglomerates are often widely diversified.

Consumer sovereignty—the “economic power” consumers exercise on the market by their purchases and refusals to purchase. In a free market, the freedom of consumers to express their preferences, i.e., consumer sovereignty, determines (a) prices, (b) the sums which are saved and invested, (c) the pattern of production, as well as (d) entrepreneurial profits and losses. Consumer sovereignty is a consequence of the freedom of individuals to express their personal (subjective) values in open competition through the market.

Consumers’ goods—anything people eat, wear out, use up in the course of daily living. Food, clothing, shelter and also luxury items are consumers’ goods. Consumers’ goods and producers’ goods (see below) are distinguished by their uses.

Consumption—the act of using things up or wearing them out.

Contract society—a society based on peaceful, voluntary interpersonal agreements. Contracts may be between two, or more, parties, written or oral, calling for the performance, or non-performance, of a certain act, or acts. In a contract society, an individual determines to a large extent his own social standing and wealth. Unlike a status society (see below) participants in a contract society may move freely from one economic social group to another insofar as their personal efforts, in cooperation and with the mutual agreement of others, permit. A contract society can endure only when, where and so long as individuals trust one another and the right of individuals to own private property is respected.

Convertible factor of production—something used in production which may be shifted, more or less easily, to another use than that originally intended. A factory that might be remodeled into apartments would be a convertible factor of production. So would a family station wagon that could be converted to truck farm produce to market. See also “Factor of production” and “Inconvertible factor of production” (below).

Cooperation, social or interpersonal—the process of working together; an act on the part of two or more persons undertaken for mutual benefit to attain a common goal. Cooperative efforts may be organized in one of two ways—(1) by force, order, decree in a command society or (2) by voluntary agreements in a contract society.

Corporation—a type of business organization defined by law which enables the company to exist as an independent entity, even if one or all of the persons supplying the original funds should die or sell their interest in the enterprise to someone else. The specific laws regulating corporations have varied from time to time, place to place under different governmental jurisdictions. Under our laws a corporation may take action in many areas, just as an individual can, making contracts, owning, buying and selling property and incurring liabilities. The liability of a corporation shareholder is now limited by law to the extent of his investment, i.e., the shares he holds in that firm. The other assets of a corporation shareholder cannot be seized in fulfillment of that corporation’s debts.

Credit expansion—most banks pool the funds of many depositors so as to reduce the risk of lending out funds left with them by depositors for safekeeping, expecting them to be available on demand. Once a bank lends out some of its depositors’ money, it no longer has on hand all the reserves it would need if all its depositors should ask at the same time to withdraw all the funds they had left with the bank for safekeeping—in checking accounts and other demand deposits. When a bank increases the number of claims to the money in its vaults in this way by lending, it is expanding credit. To expand credit, it must make it easier for persons to borrow more; it must reduce interest rates below the free market rate or relax the terms for borrowing in other ways. Banks usually justify credit expansion nowadays on the widely-accepted but fallacious theory that they have an obligation to help business firms by making money “easy” to borrow.

Crusades—religious treks to the Mideast undertaken by Christian fanatics (1096-1272) in the attempt to take Jerusalem from the non-Christian “infidels.” There were nine distinct Crusades plus the Children’s Crusade in 1212-1213.

“Cutthroat” competition—a catchy term used to describe any competition that seems “unfair.” It may be applied to cases which appear to represent price discrimination, below cost pricing, predatory pricing, dumping, etc., all of which have been ruled at times to be “in restraint of trade.” However, whether such pricing practices actually lessen, or sharpen, competition in a particular instance depends on circumstances.

Deduction—the method of developing knowledge and understanding by reasoning logically from a priori assumptions, axioms, fundamental principles. This may be graphically described as the “armchair method” of learning.

Direct exchange—barter; commodity-for-commodity trade by persons, each seeking to acquire the various things he wants to use and consume directly in exchange for the particular goods and/or services he himself has available to offer.

“Distribution,” economic—in a free market economy, the pattern of ownership which prevails at any instant. Those who contribute to production are compensated in accord with previous agreements or understandings. Thus, goods and services produced under capitalism are dispersed, i.e., “distributed” in the physical sense, as they are shipped from person to person and place to place throughout the world. No special “distribution” is necessary. However, when referring to economic “distribution” we do not have in mind their actual shipment or transport from one geographical location. Economic “distribution” takes place as everyone acquires ownership of that part of production representing his or her particular contribution. Everything that is produced comes into existence as the property of some particular person at a particular place and time, and the ownership is already dispersed—in the course of their production—among the many market participants, geographically scattered far and wide, more or less in proportion to the share each contributed to production. See “Exchange” and “Production.”

Disutility of labor—the tedium, discomfort, inconvenience, etc., which comes from having to forego immediate enjoyment, pleasure, fun, leisure, relaxation, etc., in order to work or labor in the effort to attain other goals; the dissatisfaction caused because work interferes with doing exactly what one would otherwise have preferred.

Division of labor—a technique of work or labor wherein the production process is divided into many small activities, each intended to accomplish a part or portion of the entire task. Dividing work in this way gives the persons specializing in each separate activity opportunities they wouldn’t have had otherwise—to develop speed, efficiency, and even new skills and ideas. The division of labor thus helps speed up production, improve production methods and so make increased production possible.

“Dumping”—disposal of goods or produce, usually across national boundaries, at prices judged to be below their cost. For purposes of legislation, below-cost pricing (dumping) has been defined as selling at less than the market price in the country of origin.

Duopoly or oligopoly—collective nouns referring to two, or several, business firms who together effectively control the total supply of a specific item. Duopolists and oligopolists may try, tacitly or by mutual agreement, to act like a real monopoly (see below) by restricting production so as to charge monopoly prices. However, unless they are protected in some way from would-be competitors, such agreements are bound to break down before long.

Duty—a payment due, or tax levied by, government.

Economic calculation—the mental process by which the relative importance of any particular good or service may be estimated by comparing units of each individually to a “common denominator” for which any or all of them are exchangeable. Because economic or market values are derived from personal (subjective) values and preferences of individuals, quantitative measurements and comparisons among them are impossible. An individual may know quite well what he prefers, but he cannot measure or weigh his greater preference for one thing over another. Nor can he compare his preferences to those of other persons. However, in a market economy, individuals may make certain comparisons by estimating the importance of something to them personally in terms of another commodity, a “common denominator” for which units of any and every other good or service may be exchanged. This mental process of comparing everything—raw materials, factors of production and finished goods and services—to a single very marketable commodity (money) permits producers and consumers alike to calculate, make plans and undertake business enterprises. This process of estimating the relative importance of all the things we have and all the things we want in terms of a generally-accepted medium of exchange, money, is economic calculation.

Economic goods—things people try to obtain to use or consume in the course of seeking their various personal goals; anything material or non-material which is not available in sufficient quantity to satisfy all demand. Because demand is greater than supply, economic goods are not free for the taking; they are not “free goods” (see below). People must work or pay for economic goods. Thus, economic goods are bought, sold and traded on the market.

“Economic problem”—the conflict arising out of the fact that men whose wishes are limitless live in a world where the things they want are scarce. In the attempt to alleviate this “economic problem,” men try to increase their available resources—knowledge, understanding, skills, energy, time, and ideas, as well as their supplies of economic goods and services—so as to better satisfy more of their various wants.

Economic “school” of thought—a set of theories or a body of doctrines proposed as the explanation of economic phenomena. A “school” of thought is an ideology or philosophy, not a physical school building or a legally-recognized educational institution.

Economics—the science of human action; the study of the conscious choices, actions and preferences undertaken purposively by individuals in the attempt to attain their various goals peacefully, as best they can with the time and resources available. Economics does not encompass purposively violent, coercive, destructive, deceitful actions intended to harm others.

Economize—to try to use the easiest, cheapest and most effective means available—all things considered—to accomplish one’s ends or goals. This means trying to be frugal with respect to things of great value, saving them for their relatively most urgently-desired purposes only.

Elasticity of demand—the extent to which the demand of consumers for an item is “elastic,” i.e., responsive to changes in its unit price.

Embargo—a restriction or prohibition of specific imports.

Empirical knowledge—knowledge acquired from experience, controlled experiment, observation and/or historical study.

Employee—a person hired to perform certain services for another, in accordance with previously agreed upon terms respecting money wages, commissions, bonuses, hours of work, overtime pay if any, fringe benefits and other factors related to working conditions.

Employer—one who hires other persons to perform various services on his behalf, in exchange for wages, salaries or commissions and possibly other benefits also as agreed upon.

Entrepreneur—an idea man and a decision-maker; one who undertakes projects, acts and tries to cope with changes and to bring about further changes. In economics, the entrepreneurs are the ones responsible for an economic enterprise, who decide whether or not to embark on a project and, if so, when, where and how to carry it out. They bear any loss that may result from unanticipated changes or mistakes. They receive “entrepreneurial profit” if their enterprise income is greater than total outgo.

Entrepreneurial profit—the excess of money income over money outgo of a business enterprise. Unless an enterprise recovers from its customers more than the cost of producing and/or reproducing its product, it is not yielding entrepreneurial or monetary (business) profit. Of course, a businessman may also gain a “Psychic profit” (see below) from his enterprise if he enjoys what he is doing for reasons other than the money income it yields.

Equity—the net value or net worth of a person’s property or share of ownership in a business, i.e., assets minus liabilities. The sum of each stockholder’s equity in a corporation is equivalent to the corporation’s net worth.

Exchange—this term is usually used to refer to the process of trading one good or service for another. Strictly speaking, however, every conscious action is an exchange. In the process of acting, i.e., consciously seeking to relieve a “felt uneasiness,” the actor exchanges or substitutes one situation or condition for another which, under the circumstances, he considers preferable.

Export—the verb meaning to ship out of a geographical area; also a commodity or the produce so shipped.

Factors of production—anything used in production. Land, labor and capital are the usual factors of production mentioned in textbooks. However, the term really includes time and many other non-physicaf things such as ideas, knowledge, recipes, etc., that are used to further production. See “Producers’ goods” below. It is essential for a free market economy that individuals have the right to acquire ownership of factors of production and to use them as they wish. Unless the owners of factors of production have control over them, they are not free to experiment with new ideas, methods or products in the hope of better satisfying the future demands of consumers.

Federal Reserve System—the nationwide system of banks in the United States set up by legislation passed in 1913. The “Fed,” for short, is our central bank. It is administered by a Board of Governors appointed by the President. There are 12 Federal Reserve Districts, each with one Federal Reserve Bank and many commercial member banks. The “Fed’s” operations are based on the principles of “Fractional reserve banking” (see below). All member banks are required to keep a fraction of their reserves on deposit with the Federal Reserve Bank in their District. Each of the 12 Federal Reserve Banks issues its own banknotes, known as “Federal Reserve Notes,” which are privileged as legal tender.

“Felt uneasiness”—the general economic term for an individual’s dissatisfaction with the situation which prevails. Implied in this term is the idea that human beings are not indifferent or neutral to their surroundings; in other words, they have values, preferences and are eager to improve their conditions.

Feudalism—the eight centuries, more or less, of the Middle Ages or Dark Ages, between the fall of the Roman Empire (410 A.D.) and the Renaissance. A feudalistic society is a status society. Under feudalism the majority of the people were peasants or serfs living on autarkic self-sufficient estates in the service of a privileged noble or lord.

Forage—to search for food or provisions. Only the very most primitive peoples depend entirely, for the things they need and want to consume, on finding such natural resources in their own environs.

Foreign exchange—foreign moneys, or promises-to-pay foreign money.

Fractional reserve banking—a system of banking based on pooling the deposits of many depositors so as to permit “Credit expansion” (see above). Banks have traditionally considered they were safe in lending funds that their depositors are entitled to withdraw, maintaining only fractional reserves, on the assumption it is extremely unlikely that all their depositors will ask to withdraw all the money in all their deposits at the same time. However, fractional reserve banking is unsound in principle. A bank that has loaned out more money than it can raise on demand from its assets is inherently insolvent.

Free goods—anything, material or non-material, which is available in sufficient quantity to satisfy all demand. Because demand is less than the supply available, free goods are free to anyone who wants them. They have no market price. The items that are free goods may vary from place to place and time to time, Water is a free good beside a lake but a valuable economic good in a dry desert area. Fresh air is a free good in the country, but an economic good to city residents who are willing to pay for fresh air in offices and apartments.

Free market—a market economy where private property is protected, competition is free and open, and the opportunity to trade and to make voluntary contracts is protected, so long as the persons involved do not use force, fraud or threat thereof to interfere with the equal rights of others.

Free port—an area, set apart from all domestic markets, where goods and raw materials may be received, processed and fabricated—before being shipped out once again into world trade—without having to go through a nation’s customs and be taxed as imports.

Free trade—international laissez faire; an international free market. In a free trade world, individuals would be at liberty to exchange with anyone anywhere who was willing to trade with them. Goods would cross national borders without hindrance. Capital, labor, production, goods and services would tend to go where they were most valuable, i.e., where their marginal utility was highest, where they enjoyed the greatest possible “Comparative advantage” (see above).

Gambling—an action concerning which one can know nothing in advance about the results except that a certain percentage of the persons gambling will win and a certain percentage will lose. The results depend on pure chance. No amount of knowledge or understanding can improve the odds. A person gambles when he or she bets on the turn of a roulette wheel or the toss of a coin.

Coal, end—the aim of purposive action, selected by the individual actor on the basis of his personal, subjective values, judgment, interpretation and understanding. The ever-present goal or end of every one of us is simply the relief of a “felt uneasiness.” Specific goals or ends may be short-, medium-, or long-run. The attainment of a goal or end calls for (a) planning, (b) time, and (c) various resources.

Gold—a metal, units of which have become the world’s most widely-used “trading commodity” or medium of exchange. It was gold’s popularity for various purposes that made it suitable to use in exchange as “money.” Because it is so popular it is known as a “precious metal.” Silver enjoys a similar, if lesser, popularity, is also considered a “precious metal” and has been used from time to time as a medium of exchange although not to the same extent as gold.

Government control or regulation—a government imposed and enforced restriction, directive or order.

Government intervention—an act on the part of government which interferes with the market process in some way; a coercive interference which compels peaceful persons to act differently from the way they would have otherwise, even though their actions would not have violated the equal rights of others.

Government, role of—the fundamental obligations of a government are really only two—(a) to protect the lives, property and freedom of all citizens equally from domestic and foreign intruders and (b) to adjudicate (settle through the courts) disputes that arise under its jurisdiction which the persons involved are unable to resolve peacefully among themselves.

Gresham’s law—a law of economics, not of governments, named after one of the first persons to note and describe it, Sir Thomas Gresham (1519-1579). Gresham’s law points out that when two moneys, valued differently on the market are decreed by law to be equal in value, people will try to use the money they value less (the “bad money”) to pay their bills and to keep for themselves the money they value more (the “good money”). The appearance on the market of depreciated, clipped or debased units of money, which have been legally declared to have more value than they actually do, is a signal to traders to use the legally over-valued monetary units in trade whenever possible and to hold for themselves the more valuable, but legally under-valued, monetary units. Thus in popular parlance this law has become “Bad money drives out good.” Gresham’s law applies to money the general economic law that everyone tries to use the easiest, simplest and cheapest means available to attain his or her various goals.

Hampered market economy—a market economy which evolves when various government interventions prevent or hinder certain otherwise peaceful actions of individuals, A hampered market economy cannot operate at maximum potential efficiency because government interventions tend to mislead, delay, sidetrack and discourage voluntary transactions, add to the costs of doing business, reduce production and employment and, thus, bring about different results from those of a free market. Most economies are hampered market economies.

History—past events and/or the record or study of past events; the past actions of individuals and the institutions they established, reported, related and interpreted in the light of available knowledge.

Human action—conscious, purposive, intentional action of individuals; action aimed at definite goals. See also “Action.”

“Human rights”—this term is normally used to refer to the freedom of individuals to read, write, speak and worship as they wish. The right to own property, seldom mentioned, should also be included as the basic “human right,” for the opportunity to own and control property is essential for all other “human rights.” If a person does not have the opportunity to acquire private property, he or she must submit as a serf or slave to survive, deprived of “human rights” except as they may be granted by a master.

“Idle resources”—produced or semi-produced, more or less inconvertible, factors of production, fabricated for purposes which later proved to have been mistaken. “Idle resources” are usually malinvestments, due to entrepreneurial failures in anticipating consumer demand and market conditions. This term is somewhat misleading for it bears the implication that “idle resources” may be artificially subsidized into activity and, by this simple artifice, rendered non-idle and thus “economic.”

Import—the verb meaning to ship into a geographical area from abroad; also a commodity or the produce so shipped.

Inconvertible factor of production—something used in the production of a specific good or service which has only one presently known use. It cannot be shifted or converted to serve another purpose at all, or at least not without incurring such high costs or serious difficulties as to make its conversion appear impossible, impracticable or at least not worthwhile. The huge luxury liners, that became unprofitable with the increase of air travel, and assembly line machinery, which is geared to producing a certain make or model automobile are practically inconvertible factors of production. Few, if any, entrepreneurs would be able to conceive of an idea for converting them to uses which would be profitable. See also “Factors of production” and “Convertible factor of production.”

Indirect exchange—a market transaction or trade involving a good or service on one side and on the other a “trading commodity,” i.e., a medium of exchange or money. Indirect exchange contrasts with barter or direct exchange (see above).

Induction—the method of acquiring knowledge by accumulating data and facts from experience, controlled experiments, observation and/or historical study. The methods of induction may be described in more familiar terms as the “look-see,” “trial and error” laboratory experiments and/or research of papers and artifacts.

‘‘Industrial Revolution”—any significant and perhaps especially conspicuous shift or turn-over in production methods. The term is frequently used to refer to the relatively rapid introduction, primarily in England during the 18th and early 19th centuries, of the factory system and mass production, using steam power, replacing the earlier, less efficient and smaller scale handicraft production techniques.

Infant industry—a new industry in an economy. A traditional protectionist argument on behalf of tariffs and other import barriers has been that foreign competition should be restricted to give infant industries a better chance to sell, become established and expand on the domestic market.

Inflation—an increase in the quantity of money. Inflations may be caused by a new discovery of the commodity used as money (whether shells, gold, silver or what-have-you), by a goldsmith’s issue of more “warehouse receipts” for gold than he has gold on deposit, an increase of a bank’s banknotes over and above the reserves available to redeem them, an increase in the government’s issue of printed (fiat) money, etc. Credit expansion (see above) is a variation of inflation.

Interest, interest rate—the price, usually expressed as a ratio or percentage of the sum involved, which a borrower pays for borrowing money. Borrowers are willing to pay such a premium to acquire cash funds promptly, and lenders are ready to forego the use of the funds involved until a later date, in exchange for the payment of interest, because they have different, yet dovetailing time preferences. Interest is a consequence of the fact that events take place over time and that people have values. Interest rates are composed of three factors: (1) Originary interest, based on time preference; (2) Price premium, based on the expectation of a general shift in prices, due to changes in the quantity of money; (3) Risk factor, based on the anticipated chances for success or failure of the specific enterprise concerned. A specific interest rate at a specific time and place is determined, as in the pricing auctions, by competition among prospective lenders and borrowers each bidding or refraining from bidding according to their own personal values and value scales.

“Interstate commerce”—the term used to refer to trade and market transactions carried out within this country but across State boundaries. The term is derived from the provision of the Constitution authorizing the Congress “to regulate Commerce . . . among the several States,” as well as from legislation implementing Supreme Court decisions defining this authority.

Interventionist government—a form of government which interferes, regulates, restricts, controls some, not all, peaceful actions of private individuals, even when they were not violating die equal freedom and rights of other persons. Interventionist programs inevitably help some people while hurting others. Because individuals make mistakes, they have seldom come close to the ideal, a strictly limited government, and if they have, they have usually let it deteriorate sooner or later into some form of interventionist government. The economic system associated with interventionist government is a hampered market economy.

Invest, investment—the process of directing savings into specific enterprises set up to engage in production.

“Iron law of wages”—an early economic doctrine which held that the laborers in a society could never receive more than a certain fixed percentage of the wealth produced. If their wages fell below this percent, their numbers would go down as infant mortality, diseases and starvation went up. Their employers would see to it that workers never received more in wages than the percent prescribed by this “iron law,” for they would hire fewer workers, compel them to work longer hours, or take higher incomes from the business for themselves.

“Just price” idea—the belief, associated primarily with Scholasticism that in any particular situation there was a price, wage, interest rate, profit, etc., which was “right” and “fair.”

Labor—purposive activity, work, or effort, not necessarily considered pleasurable in and of itself, but valued primarily as a means for attaining one or several of a person’s other goals, ends, wants, needs, etc.

Labor theory of value—the value of a good or service on the market is determined by the work or labor required to produce or obtain it. See “Value theories” (below).

Labor (trade) union—an organization of workers for the purpose of attaining common goals. Membership may be along company, craft or industrial lines. Although unions may be purely voluntary organizations, competing with other voluntary groups and societies for members and financial support, some organizations of workers have been given special recognition by law, entitling them to certain privileges as unions—in obtaining members, excluding non-members from competing for some jobs and bargaining with established and potential employers.

Laissez faire, French—a term applied to the political policy of leaving businessmen alone—to “do their own thing,” so to speak. If government were to adopt a policy of laissez faire this would, in effect, bring about a free market economy. The term is frequently used as a smear word to describe a system under which big business firms would be free to use any tactic, legal or illegal, to gain their own “selfish” ends at the expense of the common man or small consumer. But in fact laissez faire does not include allowing anyone the right or privilege to ride roughshod over the equal rights of others. True laissez faire would mean freedom.

Legal tender—the commodity or money which the government has recognized by law and which government requires creditors to accept when it is offered them in payment of monetary debts. The U. S. Constitution forbids the States from making “any Thing but gold or silver Coin a Tender in Payment of Debts.” The U. S. national government, however, has decreed the paper banknotes of the “Fed” to be legal tender, and their status as legal tender is indicated in print on all Federal Reserve Notes.

Liabilities—the obligations and/or debts of a person or organization.

Limited government—the ideal government, one that is restricted to its legitimate role consisting of two important functions—(a) protecting lives and property from domestic and foreign interference and (b) settling disputes through the courts. A limited government is based on equality under law for all peaceful citizens. Like a night watchman or electrified fence, it guards individuals and their property, without interfering unless provoked into action by someone who uses violence, or threat of violence, to hurt other members of the society and/or their property. A limited government leaves people free and permits them to function in peace. The economic system associated with limited government is capitalism or the free market economy.

Loss—the decline in value resulting from an action when the total yield is insufficient to cover all the costs involved; the opposite of “Profit” (see below).

Macro-economics—the name used to describe the study of mass economic phenomena, i.e., the operations and activities of large numbers of persons, groups, collectives, communities, societies, nations, etc.

Madison Avenue—one of the major north-south avenues of New York City which has come to epitomize the advertising industry, because the offices of many advertising agencies are located there.

Margin—an invisible dividing line, in economic terminology, separating (a) those persons who actually buy or sell an item on the market from those who don’t and

(b) those items that are actually traded on the market from those that aren’t. A “sub-marginal” good or service is not traded because potential purchasers value it less than they do the price they would have to pay—in time, money and effort—to acquire it.

Marginal unit—the last unit of a good or service which a person considers worth what it costs to acquire it—in time, money and effort.

Marginal utility—the usefulness or satisfaction which depends on the possession of a single unit of a particular good or service. We may determine the “marginal utility” of any item by ascertaining what we would lose in the way of satisfaction if we had to get along with one less unit of it.

Marginal worker—the worker at the margin. The marginal worker is the person whose productivity just barely covers the costs of hiring him or her. A marginal worker may become sub-marginal (or vice versa) if his productivity or the market demand for his output declines (or increases).

Market—a market is any place or geographical location where two or more persons meet and exchange goods and/or services. The term may also be used as a short cut term for the market economy or market process.

Market economy—any trading area bound into a single unit by the cobweblike network of interpersonal agreements, contracts and exchanges.

Market process—the procedure or arrangement prevailing throughout the market economy which results from the conscious, purposive actions of individuals cooperating, competing and exchanging with one another. The outcome of the market process is production and trade.

Markets, Say’s law of—a theory first set forth clearly by Jean Baptiste Say (1767-1832) to the effect that production creates its own market; there can be no widespread business slump on account of general over-production or a general shortage of money. Goods produced become purchasing power for other goods and services. Money prices adjust to help equate supply and demand.

Mass production—the process of production on a large scale for potentially large numbers of consumers; transforming large quantities of raw materials into finished consumers’ goods by means of assembly line techniques. Mass production relies heavily on specialization, the division of labor, capitalist savings and the use of tools. Mass production for mass markets takes advantage of the economies of scale made possible by standardizing products and using machines and assembly lines instead of individualistic hand labor.

Means—any resource or tool, material or immaterial, which a person finds useful for seeking a goal. Among the means or resources commonly referred to in economics are raw materials, labor, tools, factories, capital goods, money, and other things used in production.

Medium (media, pi.) of exchange—a “trading commodity” used as money in indirect exchange. As trade increases and the trading area expands, direct exchange or barter becomes cumbersome and impractical. Traders then turn to making trades in terms of some commodity which is in greater demand and thus more readily marketable than the actual items they are seeking to exchange. As a result of countless such transactions, traders may try to arrange trades in terms of several different items. In time one commodity may prove more marketable than others. Then eventually that particular commodity may be transformed from being simply one of several desirable and marketable items into the most desirable and most marketable commodity and, thus, a suitable medium of exchange. The availability of a medium of exchange contributes substantially to trade, by making transactions easier to arrange, and to production, by making economic calculation possible.

Mercantilism—an economic theory and set of political doctrines based on the concept of artificially stimulating “national wealth” by subsidizing exports of goods and the import of the precious metals (gold and silver). During the 16th, 17th and 18th centuries, quite a few governments enacted various Mercantilist interventions to protect domestic producers from competition. A period of relatively free world trade followed but Mercantilist doctrines have gained popularity in this century and many such programs are now in force in many countries throughout the world.

Micro-economics—the body of economics and economic theory which analyzes, interprets and traces all economic phenomena back to the economic unit, i.e., the individual actor, his individual actions, ideas, choices and preferences.

Money—a commodity used to facilitate trade, thus a “trading commodity” or medium of exchange. Money is the most desirable and most readily marketable commodity in an economy, the commodity which people generally are most willing to accept in trade. Austrian economist Ludwig von Mises defined money as “the most marketable good which people acquire because they want to offer it in later acts of interpersonal exchange.” (Human Action, 3rd ed., 1966, p. 401)

Money stock—the quantity of money in existence at any one time. Federal Reserve statistics calculate money stock in two ways. What they call M-l is defined as the total of (1) currency outside of banks plus (2) demand deposits subject to check. Their second calculation of money stock, M-2, includes M-l PLUS (3) time deposits at commercial banks other than large certificates of deposit. (See Federal Reserve releases for details.) Both M-l and M-2 have increased substantially in recent decades. The increase in M-2 relative to whatever metallic money has formed its base has been especially spectacular.

Monopoly, monopolist—speaking precisely, this term refers to the exclusive control of the entire supply of a specific good or service. Monopolies may be (a) natural, due to the fact that the quantity of the monopolized item is limited by nature; (b) local, due to the fact that the physical space in which the monopolist operates is strictly limited so that there is actually no room for a competitor; (c) legal, due to the fact that the opportunity to operate depends on a special legal grant, a government license, franchise or privilege. The term monopoly, as well as monopolist, is often used imprecisely to refer to almost any very large firm, or an extremely successful businessman, irrespective of the existence of competitors and potential competitors.

Monopoly price, monopoly gain—a higher unit price than would have appeared on the market under free and open competition; the extra gain, if any, from selling fewer items at such a price. A monopolist may charge a monopoly price for something and reap a monopoly gain only if the demand for it is such that enough consumers are willing to pay the higher price and so make the monopolist’s net return—from selling a smaller quantity at the higher price—greater than if he sold a larger quantity at the lower, competitive, free market, price. No monopolist, not even one who exercises exclusive control over the entire supply of a specific good or service, is always in a position to charge a monopoly price and reap a monopoly gain. This must depend on the wishes of potential consumers, and the existence of alternatives and substitutes. To yield a monopoly gain, the demand on the market for the monopolized item must be relatively “inelastic,” i.e. consumers must be ready to buy almost as many units at a higher price as they would if its price were lower. See “Elasticity of demand.” Yet no monopolist can know with any certainty in advance, when deciding what prices to ask, how “elastic” the demand for his product will be.

Most favored nations—a term used at least since 1922 to refer to those nations whose governments agree to admit each other’s products into their respective countries on more favorable terms than they grant imports from less favored nations. Tariffs on imports from most favored nations may be reduced or even eliminated by mutual agreement.

Multinational corporation (MNC)—a corporation with interests and investments in more than one country.

Neo-classical School of Economics—a school of thought or set of theories derived from the doctrines of the Classical School, modified somewhat by the marginal utility, subjective value theory. Representatives of this “School” often use mathematical formulae in the attempt to analyze and predict economic phenomena.

Net worth—the estimated market value of the assets of a person or firm, after deducting all liabilities. See also “Equity” (above).

“Niggardly,” “niggardliness” of nature—these terms were used by John Stuart Mill (1806-1873) in his Principles of Political Economy to describe the fact that the world is not as amply supplied with resources as men would wish. We must struggle to extract, transport and transform raw materials, as they appear on earth, into tools and goods to satisfy our various wants.

Nomadic tribes—small bands of wandering peoples who depend primarily on domesticated animals for the things they need and want to consume. As their livestock require new lands to graze, a nomadic tribe finds it necessary to move from place to place.

Non-tariff barriers (NTB)—governmental regulations, other than direct import taxes (tariffs), which make imports more difficult or more expensive. The purpose of non-tariff barriers—import license requirements, antidumping restrictions, Buy American stipulations, etc.— is to hamper trade and/or raise revenue for the government. Some government regulations not intended to hamper imports—domestic health and sanitation standards, trucking restrictions, automobile safety legislation, etc.—may turn out to be unintentional non-tariff barriers.

Objective characteristics—the physical or chemical properties or traits of something; its capacity to bring about a definite effect. Contrasts with subjective value which depends on the personal ideas and judgments of the individual doing the valuing. See “Value.”

Oligopoly—see “Duopoly” (above).

Open shop—a business enterprise which makes no stipulation respecting the union status of employees, both union members and non-members alike being eligible for employment.

Operating statement—a financial statement showing the total receipts and expenditures of a person or firm during a certain period of time.

Paradox of value—the apparent contradiction which exists in the statement that some things are very “valuable” in use (air, water) but not very “valuable” in trade; while some things (gold, silver) are very “valuable” in trade, but not very “valuable” in use. This “paradox” was explained when economists realized that market prices were derived from subjective (personal) values of individuals, each of whom was always comparing the relative importance to him of specific units of various commodities. Thus the market price of a particular item hinges on the service that depends on a single unit so that when the units of any good are plentiful, relatively less depends on any single unit.

Physiocrats—an economic school of thought based on the concept of “natural order” in production. The Physiocrats’ incomplete definition of production, as the result of combining human labor with nature, led them to advocate the granting of special privileges to agricultural producers.

Pickets, picketing, picket lines—terms taken from military tactics where they applied to the posting of guards around a camp to keep out intruders by using force if necessary. This terminology is inappropriate for discussing peaceful and voluntary employer-employee relations. It is perhaps suitable, however, for describing the kind of disputes that arise under current labor legislation. The picketing of an establishment holds the threat of violence if the union pickets are determined to prevent potential workers, who want no more than the opportunity to accept jobs offered them, from crossing picket lines.

Price—an exchange ratio, the ratio at which goods and services are exchanged on the market for one another, or for money. Prices are usually expressed in terms of money, i.e., the medium of exchange, currently in use on the market.

Price, law of—the law that explains market prices. The price of any item on a free market is forced by competition and the pricing process to fall within certain limits, determined by the personal, subjective, value scales of the buyers and sellers at the “margin,” (see above), i.e., the invisible dividing line between those who trade and those who don’t because they do not consider the exchange to be worth the cost—in time, money and effort.

Primitive societies—the simplest known economic arrangement. People forage, fish and hunt for food and their other necessities. They have only very crude and simple tools to use in production.

Private property—anything, usually physical, which a person may own and dispose of at will. The right of disposal, i.e., the right to control the use of a thing, is crucial! Unless a person has control of something, he cannot be said to own it. At some times and places persons have been legally treated as private property (slaves) and so bought and sold on the market. Some non-physical things may also be considered private property and so exchangeable on the market—a song, a recipe, a patented idea, a contractual right to acquire an asset, etc.

Producers’ goods—anything used in production, to produce consumers’ goods and/or other producers’ goods. Producers’ goods include raw materials, land, labor, as well as produced and partially produced tools, machines, factories and anything else used for further production. Although most people think of producers’ goods as applying only to physical things, the term also covers ideas, knowledge and recipes as they too are used to further production. Producers’ goods and consumers’ goods are distinguished by their uses.

Producers’ policy—a deliberate government policy intended to protect less efficient producers from the competition of more efficient producers. Helping some producers in this way must inevitably injure other producers, raise production costs, lower output, increase market prices and, thus, reduce the satisfaction of consumers. Mercantilism and protectionism are specific forms of producers’ policies.

Production—the process of combining raw materials, labor and other factors of production or producers’ goods over a period of time, in accord with some idea or plan, so as to create goods and/or services consumers want and value more highly than they did its component parts in their previous uses. If the process results in goods and/or services consumers do not want at all, or do not want as much as they would have the component parts in other forms, then the outcome of the process is not “production” in its true sense; but rather it is waste and destruction. It might be pointed out here also that any process which helps a product reach the final consumer—transportation, advertising, selling, giving legal advice, etc.—is a step in its production. Even though it may not physically alter the product, it is productive if it contributes in any way to the provision of something a consumer wants.

Profit—the gain derived from an action, the total yield less total costs. There are two kinds of profit: (a) “psychic profit,” i.e., personal, subjective, mental or psychological and (b) “entrepreneurial profit,” i.e., monetary or business.

Promissory note—a promise-to-pay or an IOU. In the course of doing business, private persons and business firms frequently sign promissory notes—“notes,” for short—specifying sums of money, goods or services to be delivered, and the time, terms and conditions of delivery.

Property rights—the freedom and opportunity to acquire, own, hold, use and dispose of private property. This “right” is basic to all market phenomena—exchange, division of labor, specialization, etc. It is an essential element of private property and it is also basic to so-called “human rights.”

Protectionism—a deliberate policy on the part of government intended primarily to give domestic producers a competitive advantage on the domestic market as against potential foreign suppliers. Tariffs, import quotas, direct subsidies to domestic producers and the establishment of quality standards which foreigners are unable to meet are typical protectionist devices. Cartels (see above) are feasible only if, as and when some protectionist measures are in force.

Psychic profit—the subjective or psychological gain from an action. If a person receives pleasure from giving a gift, that pleasure is a form of psychic profit. Any time a person trades voluntarily, he or she reaps a psychic profit because the value to him or her of what is received is more than that of what was given in exchange. Thus, whenever a customer buys anything he or she gains psychic profit and if the purchase seems an exceptionally good bargain, something for which he or she would have willingly paid even more, the psychic profit may be substantial. A job that is fun yields a psychic profit as compared with work that is boring. Psychic profits are in the mind. As psychic profits are subjective they cannot be measured.

Purchasing power—the ability to command goods and services through peaceful trading on the market. Purchasing power is the only real manifestation of so-called “economic power.” In a free market economy, the only way to acquire purchasing power is to produce, or to receive gifts or loans from someone else who has produced, goods and services others want in exchange. Purchasing power reflects and follows success in serving consumers, the greatest concentrations of purchasing or economic power gravitating into the hands of those who contribute the very most.

Quota—a governmental restriction or limitation of imports or exports, usually stated in terms of physical quantity or monetary value.

“Rainy day” (or plain) savings—accumulations of stocks of consumers’ goods as reserves to be consumed later— on “rainy days.”

Reformation—the religious reforms of the 16th and 17th century. The Renaissance spirit of inquiry led some thinkers to re-examine many accepted religious dogma and practices, including the doctrine of the infallibility of certain church officials. Their doubts led in time to reforms in the Roman Catholic Church and the establishment of a number of Protestant sects.

Renaissance—roughly the three centuries (1300-1600 A.D.) following feudalism when an interest in learning revived as a result of the rediscovery in Europe of the literature and art of the ancient Greeks and Romans. During the Renaissance, a spirit of inquiry among thinkers led to advances in the physical sciences, geographical knowledge, religious philosophy and political theory. Renaissance thinkers contributed to the climate of opinion permitting intellectual inquiry which made possible the evolution of more efficient methods of production.

Resources—any good or service used for production. Raw materials are called natural resources because they are natural phenomena, i.e., products of nature. As men refine and fabricate them step-by-step, they become semi-produced or produced resources, factors of production, or tools. Resources may also be non-material— knowledge, theories, understanding, skills, time, energy, ideas, etc. See “Means.”

Restraint of trade—a technical term used, although not clearly defined, in antitrust legislation which refers to activities on the part of businessmen and business firms that ostensibly lead to restricting competition and reducing commercial transactions.

“Right-to-work” laws—laws intended to prevent unions from insisting that employers with whom they have contracts hire only union members. Right-to-work laws preclude closed shops, but not union shops.

“Robber barons”—a name originally applied to some of the more flamboyant and successful 19th century entrepreneurs who extracted raw materials on a large scale, financed or pioneered mass production, amassing large personal fortunes. Implicit in this colorful expression is the idea that their wealth was gained at the expense of workers and consumer.

“Round-about” methods of production—a term sometimes used to describe production with the aid of complex tools, machines and equipment which themselves had to be produced first by a complex, time-consuming process. This term is somewhat misleading. Production is carried on with the aid of previously produced tools and machines of various kinds precisely because that is the most effective, efficient, fruitful and thus most direct—not “round-about”—method known to obtain the increased quantities of consumers’ goods desired.

Saving—the process of refraining from consuming a part of production.

Savings—a surplus of production over consumption. See “‘Rainy-day’ (or plain) savings” and “Capitalist savings.”

Scale of values—the order of importance or urgency according to which every person, consciously or unconsciously, ranks his various needs, wants, goals or ends. Everyone is always necessarily aiming at his most urgently desired, i.e., most important or most valuable, goal or end of the moment—in the light of his personal situation as he views it. See also “Value.”

Scholasticism—the doctrine and philosophy of St. Thomas Aquinas (1225-1274) and other Medieval churchmen. With respect to economics, they held that there was a “just price” (see above) and that to charge more or less than that was not right, fair or moral.

Scientific action—an action about which the results may be known in advance. The more a person can learn about the universe, the laws of the physical sciences, cause and effect, the better equipped he or she will be to undertake scientific actions with confidence. A person acts as a scientist, performing scientific actions when he or she follows the proper mechanical steps to start the motor of a car, put it in motion and steer it in a certain direction. To bake a cake according to a proven recipe is also a scientific action. Barring accidents, insufficient knowledge and human error, scientific actions have the results intended.

Seller—it is customary to speak of a trader who gives some specific good or service in exchange for money as a “seller.” In this sense, a “seller” is contrasted with a “buyer.”

Slavery, serfdom—a form of existence which allows no personal freedom. Serfs and slaves are dependent on a master because they are denied the right to become independent by acquiring private property of their own to use as they wish for their own purposes. Serfs and slaves are considered the property of their owners who have the right to control or dispose of them and/or their product.

Socialism—a theoretical economic system synonymous with communism. Karl Marx and his friend, Friedrich Engels rejected the term socialism because of its association at that time (1848) with a middle class (not workingmen) movement.

Special privileges—benefits granted by government to certain persons, firms, organizations or groups not available to everybody else in the same situation. A special privilege helps some, hurts others and, thus, is not consistent with limited government.

Specialization—the technique of production which uses specialists, each of whom performs one or several separate activities that in combination accomplish a single complex task. See also “Division of Labor.”

Specie—monetary coins, usually gold or silver. When banks have found themselves in financial difficulties as a consequence of having inflated or expanded credit (see “Credit expansion,” and “Inflation”) governments have frequently relieved them of the obligation of fulfilling their pledges to redeem their notes in gold or silver coins. In other words, banks have been permitted at times, with the permission of government, to “suspend specie payment.”

Speculation—an action which must be based on only partial knowledge and understanding. A person acts as a speculator when deciding whether, when, how and to what extent to take a specific action. The uncertainty of the future makes every conscious choice a speculation. Deciding whether or not to act—even whether or not to gamble or take a scientific action—is speculating. Entrepreneurial decisions are always speculations, for entrepreneurs can never have complete knowledge concerning the consequences of their actions.

Status society—a social arrangement based on established, government-defined “classes.” Every person in a status society is born into a certain status or “class.” Some belong to the lower classes of slaves, serfs, peasants, servants or laborers; others to more privileged classes—masters, nobles or lords; except in rare cases no-one moves out of the class into which he or she is born. Production in a status society relies to a considerable extent on the use of slave labor. In a status society, both the class structure and the institution of slavery are upheld and strengthened by the superstitious and polytheistic religions of the people.

Stock, common and preferred—a share of ownership in a business firm. Holders of shares of stock are issued stock certificates as evidence of their ownership in the firm. Holders of a company’s common stock share—according to the terms of their partial ownership—the risk of loss as well as the chance of monetary or entrepreneurial profit. When a company’s income declines, the holders of its preferred stock are given preference over the owners of its common stock in the payment of dividends. Also, if the firm goes out of business, the owners of its preferred stock have priority over the holders of its common stock if, as and when anything is salvaged from the firm’s assets.

Stock exchange—a market place where persons who want to buy or sell shares of ownership in various business firms may meet and trade with one another.

Strike—a tactic used by a group of employees who refuse to work at the jobs they had been holding, but prevent those jobs from being filled by others whom the employer might like to hire for those positions. To quit work in unison is a perfectly legitimate way to try to accomplish a common purpose. However, a strike involves more than simply quitting work in concert. Inherent in the strike concept is the claim that the strikers have a right to use force or threat of force if need be to prevent other would-be workers, known derisively as “strikebreakers” or “scabs,” from taking the jobs they had held but which they now reject at the terms being offered. When government sanctions a strike, it backs up the union’s threat with force, so that a very few union pickets usually suffice to bar other workers effectively from competing for jobs at the plant being struck and, thus, to protect the privileged position of the strikers.

Subjective value—value depending on the personal ideas and judgment of an individual. See also “Value.”

Subsidy—financial aid to some person, persons, businesses, organizations or groups. When government grants subsidies to some, it helps the recipients at the expense of those who are forced to pay the cost.

Tariff—a tax levied by government on imports, i.e., goods being brought into the area under its jurisdiction. A tariff is a particular kind of duty.

Time preference—the relative urgency of a person’s demand for present goods as compared with future goods. Like personal (subjective) values, different individuals have different time preferences and the same individual has different time preferences at different times and under different circumstances. In the Aesop fable, the Grasshopper’s time preference is such that he is probably willing to pay a special premium to enjoy consumers’ goods today. On the other hand, the Ant’s time preference tempers his desire to consume today; he sets some things aside so he may consume more tomorrow than he otherwise could.

Tool—a term usually applied to physical instruments, i.e., factors of production which are considered useful for attaining a goal—viz. a train to transport goods and people, a hammer to pound nails into a board, a computer to record data and calculate or a warehouse to store merchandise. However, ideas, knowledge and skills are also tools, for they are means we consider useful to help us accomplish our goals. Thus, a tool is any object (material or immaterial) which (a) an individual (b) considers useful (c) for a purpose. Although tools are labor-saving devices, their most important function is to increase production.

Totalitarian government—a government that controls every aspect and action of all persons and things under its jurisdiction. No government manned by fallible human beings will ever really be able to accomplish this very difficult feat. However, many governments have been based on this theory, i.e., that everything which takes place within the country should be planned by the central authority. The economic system associated with such a totalitarian government is known as communism, socialism or Nazism, i.e., Hitler’s type of National Socialism.

Trade—exchange (see above). Every trade or exchange means giving up something (some good, service or situation, separately or in some combination) to obtain something else (some other good, service or situation, separately or in some combination). It permits people to obtain things from other persons and other parts of the world that they could not acquire otherwise, or at least not as cheaply or as easily. Trade is a product of cooperation. At the same time a trade is very often a step on the road to still further cooperation.

Trust—a specific type of business structure which became important in the late 19th century. The owners of several independent companies in an industry would turn over their stock and control of their firm to “trustees” who then managed and operated the complex of several companies as a single unit under a “trust agreement.” The intent of such a “trust agreement” was to try to monopolize the entire production in an industry. (NOTE: This use of the term “trust” is distinct from its use in banking and financial communities to describe a specific legal arrangement under which funds belonging to one person are turned over to another, a “trustee,” to be managed on behalf of a third party, the “beneficiary.”)

Union shop—a business enterprise which has an agreement with a labor union requiring that all employees in certain categories must be, or must become, members of that labor union to retain their jobs; nonunion members may be hired, but only on the condition that they join the specified union within an agreed-upon time. See also “Closed shop.”

Usefulness, utility—the capability of a good or service to satisfy a need or serve a purpose. The physical characteristics or properties of a good or service usually form the basis of its utility, but the subjective value of a good or service to an individual may have real significance for market prices and pricing. The subjective views of individuals concerning the utility of a good or service may make it more or less valuable in the minds of people than its objective characteristics, its physical properties, would seem to warrant.

“Usury”—a term used to describe interest rates. By using this term the speaker implies that the rate of interest referred to is higher than he considers proper under the circumstances.

Value—the worth of anything to a specific person or persons. Value is necessarily personal and subjective, i.e., it depends on the ideas or judgment of the individuals doing the valuing. A good or service may possess objective (physical or intrinsic) properties or characteristics. However, to speak of its value as being objective or intrinsic is a contradiction in terms. Values are always personal, subjective, in the minds of the individual valuer.

Value theories—several theoretical explanations have been suggested as to why some goods and services are wanted or needed more than others and considered desirable enough for people to be willing to work or give up something else to get them. The most significant theories advanced over the centuries to explain economic and/or market values have been:

1. Goods or services are valued the same as what is given in trade for them. (Aristotle and Aquinas)

2. Goods or services are valued at their cost of production. (Adam Smith and Karl Marx)

3. Goods or services are valued at what they wtU bring in trade or “exchange.” (Adam Smith and others)

4. Goods and services are valued by individuals, as judged from their personal (subjective) viewpoints. Adam Smith recognized one form of personal evaluation, “use value.” But Smith’s concept of “use” was too narrow. Only later was full recognition, for the determination of economic value, given to the importance of individual, personal evaluations of specific units of a good or service under specific circumstances. Individuals always believe what they have, and are not trying to dispose of, is more valuable in “use” to them personally, under the circumstances, then it would be in “exchange.” Thus when they do decide to make a trade, it is because they believe what they are offering to exchange is worth less to them personally than what they expect to receive in return. Barring force, fraud and mistakes in judgment then, both parties will consider themselves to have gained as the result of a voluntary trade. (Menger, Jevons, Walras and the subjective value “Austrian” theoreticians)

Wage, wage rates—the market price paid a person for performmg a service or certain amount of labor. Wages, like prices, are exchange ratios between money and the item under consideration. A wage is simply a specific term used to describe the price—usually expressed in money terms—paid at a particular place and time for a certain amount of labor or service, as opposed to a physical good or commodity.

Wall Street—a New York City street which has become almost synonymous with the stock market, “big business,” and financial speculation. The offices of the New York Stock Exchange and of many large banks and investment firms are located there.

“Welfare economics”—the government policy of granting special privileges or subsidies to favored groups or persons. Advocates of such “welfare” programs usually ignore, or at least fail to mention, that their policies are helping some persons only at the expense of others, those who must pay their financial cost and those whose plans and activities are adversely affected.

“Wild cat” banking—a colorful phrase for describing fractional reserve banking. A “wild cat bank” is one which expands its issue of notes and loans more, on the basis of lower reserves, than more cautious bankers of its day generally consider wise. No “wild cat bank” can survive very long—its shortage of funds will become apparent as soon as a substantial number of its depositors try to withdraw their money from the bank.

“Yellow-dog” contract—an employment contract which forbids employees from joining a union, or requires them to resign their jobs if they are, or ever should become, union members. The opposite of a closed shop (see above).

Free Market Economics: A Basic Reader