E is for Earned Income

Part E in The Economics Insiders Dictionary.

Earned income: Wages or profits earned by labor or capital for their role in producing goods and services. As such, earned income excludes economic rent and interest, which are property and financial returns that must be paid out of profits and wages.

Ebitda: An acronym for earnings before interest, taxes, depreciation and amortization. A more colloquial term is cash flow.

Economic rent: See Rent, economic.

Economist: Originally a member of the Physiocratic School (L’Économistes) founded by Francois Quesnay who developed the Tableau Économique as the first formal national income statement. They sought to replace France’s proliferation of excise and income taxes with a land tax” (l’impôt unique), on the logic that the sun and other forces of nature created the economic surplus off which industry and commerce functioned as merely converting natural resources into goods. The Économistes accordingly worked with other reformers to check the aristocratic and royal rentiers, prompting Abbot Barruel to write in his memoirs with respect to the French Revolution that “Three groups characterize the revolution; atheists, Encyclopaedists and Economists.” Along similar lines Edmund Burke wrote in On the French Revolution that “The age of chivalry has gone. An age of sophists, economists and calculators has triumphed; and the glory of Europe has been extinguished for ever.” (See Dismal Science.) The tax reformer Henry George derided economics as: “…a science which…seems but to justify injustice, to canonize selfishness by throwing around it the halo of utility…” (Study of Political Economy, p. 6).

The Greek roots of the term “economics” stem from Aristotle, whose terms oikos (“house” or “household”) and nomos (rule) often is trivialized as “household management.” The paradigmatic “household” was the Near Eastern “large house” (Sumerian and Babylonian e.gal), a temple and later a palace, which Assyriologists usually translate as “large institutions.” It was from these public institutions that private households adopted standardized weights, measures and prices, as well as other management tools.

For examples of modern deductive economic methodology, see Diminishing Returns, Factoid and Parallel Universe. For its general methodology see Junk Science.

Enlightenment: The Enlightenment presented its program as stripping away artificial political institutions so as to restore the natural order. Diderot explained that the natural order would be restored when the last king was strangled with the entrails of the last priest. Marx was the final expression of the liberal hope that the state would wither away – an attitude that would be inverted by his major political followers.

Environment: In statistics, the context within which trends and correlations operate, e.g. weather patterns for agricultural forecasts. For economic statistics, the institutional context within which these trends occur. The assumption underlying regression analysis of trends is that the environment must remain constant. But in practice the environment is continually changing. This results in a feedback between economic trends and the surrounding environment, including now the geological environment as well, as a result of global warming and pollution. (See Debt Pollution, Externality and World System.)

Equilibrium: Equilibrium analysis implies that any disturbance will set in motion a self-curing response, establishing a new equilibrium. Hence there can be no such thing as a serious structural problem, especially inasmuch as the equilibrium is said to result in a balance where every factor of production receives its fair economic value. (See Factoid and Invisible Hand.) The notion that equilibrium represents an inherently stabile balance – especially one toward which economies naturally tend – is one of the least helpful ideas in economics.

By definition, any economy is in a state of equilibrium at any given point in time. A man falling on his face is in equilibrium as his head hits the ground. A third-world debtor economy is in equilibrium under conditions where it sells off the pubic domain to foreign creditors to use the proceeds to pay off its debt and sustain capital flight.

In analyzing equilibrium it is necessary to ask just what is being “adjusted” to what, and how the adjustment process operates in terms of the distribution and allocation of income and wealth. For instance, most economic dynamics are exponential functions (such as compound interest), and therefore are polarizing. This leads to “punctuated evolution” by quantum leaps and phase changes. At the point where conflicting economic trends intersect, a political decision must be made that is deemed “exogenous” to the equilibrium models. Although economists define their discipline as the science of allocating scarce resources among competing ends, when resources really get scarce they call it a crisis and turn matters over to the politicians.

Euphemism: The substitution of a nice-sounding term for an unpleasant reality. News reports, for instance, call declines in the stock market “profit taking” or a “buying opportunity” instead of a loss. In the process of distracting attention, euphemism tends to become elaborated into a full-fledged cover story. Since the economics profession has become a public relations office creating euphemisms for finance capitalism and the Washington Consensus, the aim has been to prejudice listeners into perceiving reality as cognitive dissonance, rejecting it in favor of the cover story. Among the most egregious euphemisms along these lines are capital gain, democracy, developing country, free market, incentive, labor capitalism, and reform.

Euthanasia of the rentier: A phrase coined by Keynes in his General Theory of Interest, Employment and Prices, reflecting his preference for policies that favor debtors over creditors, and his belief that economies would be better off without stock market brokers and other financial-sector overhead. The alternative is euthanasia of the rest of the economy.

Exponential functions: See Compound Interest, Doubling Time, Protecting Savings, and Rule of 72.

Externality: Most economic practices have an impact that goes beyond the bottom line of the business as such, affecting society at large. A large number of these “external” effects are negative – pollution, health problems for employees, and political influence. Free-market models seek to distract attention from these adverse contextual side effects by deeming them “external” to the proper subject matter of economics, on the principle that what is not discussed or acknowledged will not be regulated or taxed. (See Decontextualization, Law of Unintended Consequences and Systems Analysis.)

Extremist: Someone who sees that nearly all social and economic dynamics are polarizing, positive-feedback processes, so that economies tend to move toward extremes. Much like religious fundamentalists, political and economic extremists believe that nearly all social dynamics must be harnessed to do the bidding of their belief system.