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Terms beginning with  L
Labour Labour intensive Labour market flexibility Labour theory of value Laffer curve Lagging indicators Laissez-faire Land Land tax Law and economics LBO Leading indicators Lender of last resort Leverage Leveraged buy-out Liberal economics Liberalisation LIBOR Life Life-cycle hypothesis Liquidity Liquidity preference Liquidity trap Lock-in Long run Lump of labour fallacy Lump-sum tax Luxuries
LABOUR
One of the FACTORS OF PRODUCTION, with LAND, CAPITAL and ENTERPRISE. Among the things that determine the supply of labour are the number of able people in the POPULATION, their willingness to work, labour laws and regulations, and the health of the economy and FIRMS. DEMAND for labour is also affected by the health of the economy and firms, labour laws and regulations, as well as the PRICE and supply of other factors of production.
In a perfect market, WAGES (the price of labour) would be determined by SUPPLY and demand. But the labour market is often far from perfect. Wages can be less flexible than other prices; in particular, they rarely fall even when demand for labour declines or supply increases. This wage rigidity can be a cause of UNEMPLOYMENT.
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LABOUR INTENSIVE
A production process that involves comparatively large amounts of LABOUR; the opposite of CAPITAL INTENSIVE.
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LABOUR MARKET FLEXIBILITY
A flexible LABOUR market is one in which it is easy and inexpensive for FIRMS to vary the amount of labour they use, including by changing the hours worked by each employee and by changing the number of employees. This often means minimal REGULATION of the terms of employment (no MINIMUM WAGE, say) and weak (or no) trade UNIONS. Such flexibility is characterised by its opponents as giving firms all the power, allowing them to fire employees at a moment’s notice and leaving workers feeling insecure.
Opponents of labour market flexibility claim that labour laws that make workers feel more secure encourage employees to invest in acquiring skills that enable them to do their current job better but that could not be taken with them to another firm if they were let go. Supporters claim that it improves economic EFFICIENCY by leaving it to MARKET FORCES to decide the terms of employment. Broadly speaking, the evidence is that greater flexibility is associated with lower rates of UNEMPLOYMENT and higher GDP per head.
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LABOUR THEORY OF VALUE
The notion that the value of any good or service depends on how much LABOUR it uses up. First suggested by ADAM SMITH, it took a central place in the philosophy of KARL MARX. Some neo-classical economists disagreed with this theory, arguing that the PRICE of something was independent of how much labour went into producing it and was instead determined solely by SUPPLY and DEMAND.
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LAFFER CURVE
Legend has it that in November 1974 Arthur Laffer, a young economist, drew a curve on a napkin in a Washington bar, linking AVERAGE tax rates to total tax revenue. Initially, higher tax rates would increase revenue, but at some point further increases in tax rates would cause revenue to fall, for instance by discouraging people from working. The curve became an icon of supply-side ECONOMICS. Some economists said that it proved that most governments could raise more revenue by cutting tax rates, an argument that was often cited in the 1980s by the tax-cutting governments of Ronald Reagan and Margaret Thatcher. Other economists reckoned that most countries were still at a point on the curve at which raising tax rates would increase revenue. The lack of empirical evidence meant that nobody could really be sure where the United States and other countries were on the Laffer curve. However, after the Reagan administration cut tax rates revenue fell. American tax rates were already low compared with some countries, especially in continental Europe, and it remains possible that these countries are at a point on the Laffer curve where cutting tax rates would pay.
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LAGGING INDICATORS
Old news. Some economic statistics move weeks or months after changes in the BUSINESS CYCLE or INFLATION. They may not be a reliable guide to the current state of an economy or its future path. Contrast with LEADING INDICATORS.
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LAISSEZ-FAIRE
Let-it-be ECONOMICS: the belief that an economy functions best when there is no interference by GOVERNMENT. It can be traced to the 18th-century French physiocrats, who believed in government according to the natural order and opposed MERCANTILISM. ADAM SMITH and others turned it into a central tenet of CLASSICAL ECONOMICS, as it allowed the INVISIBLE HAND to operate efficiently. (But even they saw a need for some limited government role in the economy.) In the 19th century, it inspired the British political movement that secured the repeal of the Corn Laws and promoted FREE TRADE, and gave birth to THE ECONOMIST in 1853. In the 20th century, laissez-faire was often seen as synonymous with supporting MONOPOLY and allowing the BUSINESS CYCLE to boom and bust, and it came off second best against KEYNESIAN policies of interventionist government. However, mounting evidence of the inefficiency of state intervention inspired the free market policies of Ronald Reagan and Margaret Thatcher in the 1980s, both of whom stressed the importance of laissez-faire.
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LAND
One of the FACTORS OF PRODUCTION, along with LABOUR, CAPITAL and ENTERPRISE. Pending colonisation of the moon, it is in fairly fixed SUPPLY. Marginal increases are possible by reclaiming land from the sea and cutting down forests (which may impose large economic costs by damaging the environment), but the expansion of deserts may slightly reduce the amount of usable land. Owners earn MONEY from land by charging RENT.
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LAND TAX
Henry George, a 19th-century American eco¬nomist, believed that taxes should be levied only on the value of LAND, not on LABOUR or CAPITAL. This “single tax”, he asserted in his book, PROGRESS AND POVERTY, would end UNEMPLOYMENT, POVERTY, INFLATION and INEQUALITY. Many countries levy some tax on land or property values, although George’s single tax has never been fully implemented. This is mainly because of fears that it would drive down land PRICES too much or discourage efforts to improve the quality (that is, the economic value) of land. George addressed this concern by arguing that the tax should be levied only against the value of “unimproved” land. Certainly, a land tax has obvious advantages: it is simple and cheap to levy; evasion is all but impossible; and it penalises owners who do not put their land to work.
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LAW AND ECONOMICS
Laws can be an important source of economic ¬EFFICIENCY – or inefficiency. Early economists such as ADAM SMITH often wrote about the economic impact of legal matters. But ECONOMICS subsequently focused more narrowly on things monetary and commercial. It was only in the 1940s and 1950s, at the University of Chicago Law School, that the discipline of law and economics was born. It is now a substantial branch of economics and has had an impact beyond the ivory towers.
The "economics" of law and economics is firmly in the LIBERAL ECONOMICS camp, favouring free markets and arguing that REGULATION often does more harm than good. It stresses the economic value of having clear, enforceable PROPERTY RIGHTS, and of ensuring that these can be bought and sold. It has encouraged many ANTITRUST policy¬makers to focus on maximising consumer WELFARE, rather than, say, protecting small FIRMS or opposing big ones just because they are big. It has also ventured into broader sociological issues, for instance, analysing the economic causes of criminality and how to structure legal incentives to reduce crime. (See also EVOLUTIONARY ECONOMICS.)
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LBO
See LEVERAGED BUY-OUT.
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LEADING INDICATORS
Economic crystal balls. Also known as cyclical ¬indicators, these are groups of statistics that point to the future direction of the economy and the BUSINESS CYCLE. Certain economic variables, fairly consistently, precede changes in GDP and certain others precede changes in INFLATION. In some countries, statisticians combine the various different leading indicators into an overall leading index of economic GROWTH or inflation. However, there is not necessarily any causal relationship between the leading indicators and what they are predicting, which is why, like other crystal balls, they are fallible. Contrast with LAGGING INDICATORS.
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LENDER OF LAST RESORT
One of the main functions of a CENTRAL BANK. When financially troubled BANKS need cash and nobody else will lend to them, a central bank may do so, perhaps with strings attached, or even by taking control of the troubled bank, closing it or finding it a new owner. This role of the central bank makes CREDIT CREATION easier by increasing confidence in the banking system and minimising the RISK of a bank run by reassuring depositors that their MONEY is safe. However, it also creates a potential MORAL HAZARD: that banks will lend more recklessly because they know they will be bailed out if things go wrong.
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LEVERAGE
See GEARING.
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LEVERAGED BUY-OUT
Buying a company using borrowed MONEY to pay most of the purchase PRICE. The DEBT is secured against the ASSETS of the company being acquired. The INTEREST will be paid out of the company’s future cashflow. Leveraged buy-outs (LBOs) became popular in the United States during the 1980s, as public DEBT markets grew rapidly and opened up to borrowers that would not previously have been able to raise loans worth millions of dollars to pursue what was often an unwilling target. Although some LBOs ended up with the borrower going bust, in most cases the need to meet demanding interest bills drove the new managers to run the firm more efficiently than their predecessors. For this reason, some economists see LBOs as a way of tackling AGENCY COSTS associated with corporate governance.
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LIBERAL ECONOMICS
LAISSEZ-FAIRE CAPITALISM by another name.
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LIBERALISATION
A policy of promoting LIBERAL ECONOMICS by limiting the role of GOVERNMENT to the things it can do to help the market economy work efficiently. This can include PRIVATISATION and DEREGULATION.
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LIBOR
Short for London interbank offered rate, the rate of INTEREST that top-quality BANKS charge each other for loans. As a result, it is often used by banks as a base for calculating the INTEREST RATE they charge on other loans. LIBOR is a floating rate, changing all the time.
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LIFE
Human life is priceless. But this has not stopped economists trying to put a financial value on it. One reason is to help FIRMS and policymakers to make better decisions on how much to spend on costly safety measures designed to reduce the loss of life. Another is to help insurers and courts judge how much compensation to pay in the event of, say, a fatal accident.
One way to value a life is to calculate a person’s HUMAN CAPITAL by working out how much he or she would earn were they to survive to a ripe old age. This could result in very different sums being paid to victims of the same accident. After an air crash, probably more MONEY would go to the family of a first-class passenger than to that of someone flying economy. This may not seem fair. Nor would using this method to decide what to spend on safety measures, as it would mean much higher expenditure on avoiding the death of, say, an investment banker than on saving the life of a teacher or coal miner. It would also imply spending more on safety measures for young people and being positively reckless with the lives of retired people.
Another approach is to analyse the risks that people are voluntarily willing to take, and how much they require to be paid for taking them. Taking into account differences in WAGES for high death-risk and low death-risk jobs, and allowing for differences in education, experience, and so on, it is possible to calculate roughly what value people put on their own lives. In industrialised countries, most studies using this method come up with a value of $5m–10m.
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LIFE-CYCLE HYPOTHESIS
An attempt to explain the way that people split their INCOME between spending and saving, and the way that they borrow. Over their lifetime, a typical person’s income varies by far more than how much they spend. On AVERAGE, young people have low incomes but big spending commitments: on investing in their HUMAN CAPITAL through education and training, building a family, buying a home, and so on. So they do not save much and often borrow heavily. As they get older their income generally rises, they pay off their mortgage, the children leave home and they prepare for retirement, so they sharply increase their saving and INVESTMENT. In retirement, their income is largely or entirely from state benefits and the saving and investment they did when working; they spend most or all of their income, and, by selling off ASSETS, often spend more than their income.
Broadly speaking, this theory is supported by the data, though some economists argue that young people do not spend as much as they should on, say, being educated, because lenders are reluctant to extend CREDIT to them. One puzzle is that people often have substantial assets left when they die. Some economists say this is because they want to leave a generous inheritance for their relatives; others say that people are simply far too optimistic about how long they will live. (See also PERMANENT INCOME HYPOTHESIS and RELATIVE INCOME HYPOTHESIS.)
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