Invisible hands. Zombie banks. Predatory pricing. Economics terminology can sound pretty terrifying. Dan Lapedus checks out some of the most horrific and explains all
The jargon of economics can be pretty horrifying. And beyond understanding what’s really being said, some of the terms sound like things from your worst nightmare. So here’s a few of my favorite terror-inducing terms and what they really mean.
1. Creative Destruction
In what sounds like something from Independence Day, ‘creative destruction’ doesn’t refer to the inventive ways aliens have of destroying famous landmarks, but actually describes the course of change in society because of the innovation that happens in markets. Examples include the development of the smartphone replacing the brick phone, or refrigerators replacing the need for people to deliver ice to keep food cool, or even the ‘creation’ of Netflix leading to the ‘destruction’ of the DVD industry. We see how new products replace old ones, but also how jobs can be destroyed during the process, such as the demise of jobs in video stores as more people stream movies online. In order to satisfy society’s needs, we find more innovative ways to do more with less. And that’s ‘creative destruction’.
2. Invisible Hand
No this is nothing like Paranormal Activity (the most profitable film ever made btw) where an invisible hand – or ghost or poltergeist or whatever - moves all your furniture about without a thought for feng shui. This invisible hand in fact moves a market towards its best possible outcome (so the theory goes). Specifically, Adam Smith’s idea is that people should be left to buy and sell goods freely, as the competition between traders leads to the lowest possible price – which benefits both the buyer and seller. If we take our wandering furniture as an example, we can see how in this market there are many different shops to initially buy from, and they’re all competing with each other to gain customers. If one furniture shop offers a lower price, or something better (like a sofa with recliners – ooh), then they’ll sell more and make more profit. So, the best outcome for both parties is dictated, it seems, by an invisible, and rather spooky, hand, which is really just supply and demand in action.
3. Predatory Pricing
This term is inspired by the horrifically low prices witnessed in certain markets. Predatory pricing is when a business sets a price so low that other firms can’t compete, thus giving them an unfair advantage in the market. It’s illegal and there have been many cases over the years, notably involving corporation’s and countries, such as Amazon vs France in 2009. Here, the French government ordered the Amazon to stop offering free shipping because it violated their laws. The company refused the order, and were fined €1000 per day – which they happily paid, as this was far less than the potential profit lost if their customers left them due to the new shipping charges. Eventually a law was created banning free shipping in France, in order to keep the market fair, but when Amazon replied they charged a mere one cent for shipping – therefore rendering the law pretty ineffective.
This one sounds like some sort of horrific zombie virus. ‘Hysteresis’ is a phenomenon in which a single disturbance affects the course of an economy – for example, unemployment. Sound pretty disturbing right? Well it is. This is because the long-term effects of an economic downturn can lead job seekers to become permanently unemployable due to a deterioration in their self-confidence and skills. And it can literally happen to anyone. As people become more accustomed to the lower standard of living when unemployed, they may not be as determined as they once were to achieve a higher standard of living. At the same time, it becomes more socially acceptable to be unemployed even after the economy gets going again, as people may be disinterested in returning to the workforce, creating a horde of zombified economic agents. A bit like 28 Days Later. All we need now is Danny Boyle and we’ll have a classic.
5. Zombie Banks
Speaking of zombies, what do you do when banks themselves become zombified? Well, this terms refers to banks that have no actual worth because their liabilities exceed their assets - but that continue to operate because of government backing or bail outs. It’s what happened to some banks after the 2008 Financial Crisis. They’re zombies because the they’re technically ‘dead’, but they’re still walking around. Braaains.