International Banks and Funds

Insurance

A method of protecting against future financial loss. Through insurance, the risk of such loss is transferred to an insurance company or other insuring organization.

HOW INSURANCE WORKS

Combined Risks. Insurance purchasers substitute the cost of insurance for the possibility of much larger future losses. To illustrate, imagine that 200 people own antique automobiles, each worth $20,000. The owners realize that their cars could be stolen or destroyed in a fire or collision. Each therefore buys a policy that insures against such loss during the next 12 months. Through past experience, the company has found that an average of one out of every 200 antique cars it insures is stolen or destroyed each year. By charging each of the 200 owners $125, the company will accumulate a fund of 200 x $125, or $25,000. That amount will be enough to pay for the expected $20,000 loss. In addition, it will pay the company's operating expenses, including sales commissions, salaries, rent, office expenses, taxes, and so forth and also furnish a safety margin in case there is more than one loss. From the viewpoint of the policyowners, insurance removes the risk of financial loss of the types and amount covered by their policies.

Insurance companies are able to accept their policyholders' risks because they insure many individuals and can rely upon the law of large numbers. They know that when a large number of individual risks are combined, the total amount of loss can be predicted with reasonable accuracy. Insurers do not predict which ones of the many risks they insure will have losses. Instead, they forecast the total amount of loss payments for the entire group. That amount plus the cost of operating the insurance business is divided among all of the policyholders.

Features of Insurable Risks. Not all risks can be insured. Risks like gambling or investments that can result in either loss or profit generally are not insurable. Only pure risks, those whose outcome can be only loss or no loss, can be insured. The costs of fire, illness, and lawsuits are examples. But while many pure risks are insurable, some are not. Insurable risks usually have four main features.

1) There must be many similar loss exposures. Without this feature, insurers would not be able to make reliable forecasts of total insured losses.

2) Losses must be definite, measurable, and important. A definite loss is one that is obvious; its happening is clear and unmistakable. If insured losses were vague and indefinite there would be endless disputes between insured persons and insurers. Losses are measurable when their dollar amount can easily be determined. In contrast, the purely sentimental value of personal trinkets or souvenirs is not easily measurable and not readily insurable. Insured losses also must be important. They must be large enough to be worth insuring.

3) Losses must be accidental. This feature requires insurable losses to be unintended and unexpected by the policyholder. Intentional loss, such as arson or other damage known to have been purposely caused by a property owner, cannot be insured. An example of an expected loss is normal property depreciation; because it is not accidental, it is not insurable. 4) Catastrophic loss must be extremely unlikely. This means that large numbers of the insured objects must not be subject to simultaneous loss. Unemployment compensation is a type of risk that can involve catastrophic loss and therefore cannot be covered by private insurers. Insurance Pricing. Insurance companies must charge enough to cover their costs. But in two important respects insurance pricing differs from the pricing of other products. The first difference is that when an insurer sells a policy it has no way of knowing what its costs for the policy will be. It cannot simply add up the cost of the labor, materials, rent, advertising, and so forth that have gone into “making” the policy. Instead, it must estimate the policy's ultimate cost, primarily on the basis of past claims submitted by policyholders. The second difference between insurance pricing and the pricing of other products is that in the case of insurance the cost to the seller depends in part upon who the buyer is. Because insurance costs vary from one policyholder to another, different people must be charged different prices for policies providing the same kinds and amounts of insurance.

Premiums and Rates. The price of an insurance policy is called its premium. Premiums are based upon an insurance rate per exposure unit. For example, the exposure unit in life insurance is the number of thousands of dollars of insurance. If the rate for a particular policy is $15 per thousand and the policy provides $50,000 of coverage, the premium is $15 x 50, or $750 per year. Various exposure units are used in other kinds of insurance. They include: in fire insurance, $100 of coverage; in workers' compensation insurance, $100 of payroll; and in auto insurance, the number of autos insured.

Class Rates. Most insurance rates are class rates. That is, insured risks are classified on the basis of several important characteristics and all that are in the same class are charged the same rate per exposure unit. In life insurance, for instance, policyholders are classified on the basis of their age and sex. The rates reflect insurance company records of the likelihood of living and dying at various ages. Class rates are used in auto insurance also, but in this case the rates take into account a greater number of characteristics, including the territory in which the rate applies and the age, sex, marital status, and motor vehicle accident and conviction record of all drivers in the policyholder's household.

WHO PROVIDES INSURANCE

Insurance is furnished by private insuring organizations and by governmental agencies. Private Insurance Organizations. There are several types of private insurers. Stock Insurance Companies. A stock insurance company is a corporation that is engaged in the business of insurance. Like any other corporation, a stock insurer is owned by its stockholders. They elect a board of directors, which appoints the officers responsible for operating the company. Most of the policies issued by stock companies are non-participating. That means that dividends are not payable to the policyholders. Some stock life insurance companies do issue participating policies. In such cases the policyholders usually receive annual dividends. The dividends are a partial return of the annual premiums, reflecting the difference between the premiums charged and the amount needed by the company to cover its costs.

Mutual Insurance Companies. Mutual companies have no stockholders; they are owned by their policyholders. A mutual company's excess earnings, if any, are returned to its policyholders. The return may be in the form of the dividends paid on participating policies or, in the case of short-term policies like auto or home insurance, may be in the form of a reduction in the premiums charged for renewal policies.

Reciprocal Exchanges. This type of insuring organization is sometimes called an interinsurance exchange. It is an association whose members exchange insurance. In other words, the members insure one another. In contrast, both stock and mutual insurance companies, as entities, insure their policyholders; their policyholders do not directly insure each other. The administrative duties of a reciprocal exchange are handled by an attorney-in-fact under authority granted by the policyholders.

Lloyd's of London. The most famous insurer, Lloyd's is also one of the oldest. Its beginnings go back to late-iyth century London, where Edward Lloyd's coffeehouse became known as a place where shipowners could find men interested in insuring ships and cargoes. The shipowners would go from table to table at the coffeehouse and other men, called underwriters, would agree to insure portions of their risks. Operations today are basically the same.

Lloyd's is not an insurance company; it is an association of individuals who provide insurance. The approximately 15,000 members are organized into about 350 groups, called syndicates. Each syndicate is headed by an underwriter, who decides which risks or portions of risks the syndicate will insure. The syndicates operate much like insurance companies, but the security of their policies rests on the financial strength of the individual members. If it became necessary, each syndicate member would be personally responsible for insured losses down to his or her last penny. Much of the fame of Lloyd's of London is attributable to the insuring of unusual risks such as pianists' fingers and prizes for holes-in-one at golf tournaments. However, the great bulk of the business insured at Lloyd's is conventional ocean marine and other property-casualty coverages.

Health Associations. In the United States, nonprofit organizations have been established under special state laws to handle advance payment of hospital and medical services.

The best known are Blue Cross and Blue Shield plans. They usually are governed by boards of directors representing hospitals, the medical profession, and the general public. The plans offer service contracts for hospital or doctor care. Subscribers receive the specified hospital or medical service and the plan reimburses the hospital or doctor furnishing the care.

CRIME INSURANCE

Crime insurance protects against loss of money or other property by dishonest acts. The auto and home insurance policies carried by families and individuals include this protection. In insuring business firms, a distinction is made between crimes committed by employees and those committed by other persons. Loss caused by the former is covered by fidelity bonds. Loss caused by people who are not employees of the insured organization is covered by policies that insure against specific types of crime.

Nonemployee Crime. Burglary and robbery are the crimes most commonly insured against. The distinction between the two perils is important, because a policy covering one may not cover the other.

Burglary means the taking of property by breaking into the place where it is kept. A safe burglary policy, for example, covers money or other property stolen by breaking into a locked safe. The policy requires that there be visible marks showing that the safe was forced open. A mercantile open stock burglary policy covers merchandise and equipment taken by burglars who break into or out of a locked building.

In contrast to burglary, robbery means taking property by violence or threat of violence. A business with robbery insurance is protected against crime loss if an employee or messenger is held up or killed. Some robbery policies also cover property taken by other criminal acts when an employee is aware of the act, such as if a person grabs some merchandise and runs out of a store with it.

Employee Crime. Burglary and robbery policies exclude losses caused by employees of the insured organization. Employee dishonesty losses are covered by contracts called fidelity bonds. The protection applies to the loss of money,-securities, merchandise, or other property stolen by employees. It does not cover loss caused by any owner, partner, officer, or director. Fidelity bonds may be written to cover either employees listed by name, specified positions, such as cashier or accountant, or all employees without naming them or their positions. The last of these is called a blanket fidelity bond.

TRANSPORTATION INSURANCE

The risks of truck, train, plane, or ship transportation fall into either of two categories of insurance, inland marine or ocean marine. Neither of the terms is descriptive. Inland marine deals primarily with the risks of land transportation, while ocean marine may cover transportation on inland waters as well as on the high seas.

Inland Marine Insurance. Numerous loss exposures associated with motor, rail, and air transport are handled by inland marine insurance.

Property in Transit. Property being shipped from one place to another is subject to loss or damage from many sources. Insurance can be either for a list of named perils such as fire, explosion, collision, flood, and so forth, or for all risks of loss that are not explicitly excluded. Policies may be written to cover single shipments or all shipments during a one-year period. Special transit policies have been designed for those who make frequent shipments by parcel post or by registered mail. Another special policy covers shipments by armored car.

Bailee Liability. Bailees are persons or organizations having temporary custody of property that belongs to others. Examples include truckers and other carriers, dry cleaners, and parking garages. Depending upon the circumstances, bailees are responsible for exercising certain degrees of care to protect the property in their control. A bailee who does not use the required care may be legally liable to the owners of property that is damaged. Bailee liability insurance covers that potential loss. Some bailee policies are designed to reimburse the property owners even if the bailee is not legally liable for the damage; such contracts are called bailees' customers policies. Fixed Transportation Property. This division of inland marine insurance covers fixed property that is used to facilitate transportation, such as bridges, tunnels, and pipelines.

Floaters. Floaters are policies covering moveable property wherever the property is located. Building contractors, for instance, own earth-moving equipment, compressors, hoists, scaffolding, and other items that are moved from one job site to another and are subject to loss from many sources. A contractor's equipment floater covers the property, both while at a particular location and while in transit. Other floaters have been designed to insure other kinds of property, ranging from photography equipment to livestock, from wedding presents to oil drilling rigs.

Ocean Marine Insurance. Ocean marine policies furnish protection for four types of losses involving water transportation. The first is damage to the hull of the ship itself. Second, the cargo may be damaged. Cargo insurance usually is provided by means of an open contract that automatically covers all shipments in which the policyholder has insurable interest. Third, there may be loss of freight, meaning the payment for transporting the cargo. Usually the shipowner will not be entitled to this payment if the cargo is not delivered. The potential loss of freight therefore is customarily made a part of the hull insurance. The last of the losses covered by ocean marine insurance is the cost of legal liability claims. Liability insurance protects the shipowner from bodily injury and property damage liability claims resulting from collisions and other incidents.

Interest

A payment or charge for the use of borrowed money. Interest is the difference between the amount that must be repaid and the amount borrowed. An interest rate is the amount of interest that accrues in proportion to the principal--the amount borrowed or owed--per unit of time. Interest rates are usually given in percent per year, although interest is almost always charged or paid at intervals greater or less than one year. If interest is charged or paid as a fixed percentage of the original principal it is called simple interest. If interest is charged or paid at shorter intervals than the whole period of the loan, on the total amount owed each interval, it is referred to as compound interest. For example, a $10,000 loan for ten years at 10 percent per year will accrue a total of $1,000 in simple interest. But the same loan, if interest is compounded twice yearly during those ten years, will accrue a total of $1,653.30 in compound interest.

All participants in a modern economy are bound together in a complex web of interest-bearing debt. Individuals receive interest not only on savings accounts and other personal financial investments, but also on the funds held by institutions to provide them with pensions or their heirs with life insurance. Likewise, even people who have never signed a promissory note or visited a pawnbroker are likely to be paying interest on such debts as home mortgages, installment loans, and credit-card balances. For every merchant, every farmer, and every manufacturer, interest is among the foremost costs of doing business. A large share of the taxes collected by every modern government goes to pay interest on its debts. All the “big” economic factors that determine the possibility of getting a job and earning a living--inflation and deflation, prosperity and depression, the balances of international trade and payments--are strongly, even decisively, influenced by changes in levels of interest rates.

HISTORY Origins. Interest, as a major factor in social life, came into existence together with societies based on private property. In the Mediterranean world this process took place during the ninth and eighth centuries B.C. Previously, the usual social structure was feudalistic. A king--an Agamemon, a Solomon, a Gilgamesh--ruled, with his military and priestly retainers, from a fortified palace that also served as a storehouse. The common people tilled the king's lands, tended his flocks, weaved at his looms, built his walls and roads, and fought on foot in his wars. In return, during hard times they could subsist on rations provided from the royal or temple storehouse. In this moneyless command economy there could be neither borrowers nor lenders. But the feudal order that preceded the Classical world was mortally wounded by a series of natural catastrophes and finished off by peasant revolutions. It was replaced by a world of city-states whose citizens were independent landowning farmers.

As an independent proprietor, each of these farmers lacked the security formerly provided by the royal storehouse. He now had to rely instead on the grain stored in his own barn. If a crop failed, or if his reserves ran out before harvest time, he had to borrow the necessary food from a better-provided neighbor. His harsh dilemma--work hard to build up a security reserve or risk falling into dependence on others-- was forcefully expressed by the 8th century B.C. Greek poet Hesiod in Worlds and Days:

O noble Perses, keep my words in mind, And work till Hunger is your enemy And till Demeter, awesome, garlanded, Becomes your friend and fills your granary. For Hunger always loves a lazy man; Both gods and men despise him…. But you must learn to organize your work So you may have full barns at harvest time And you'll be glad, I think, to have your food Stored up to draw on. Till pale spring arrives, You'll have your fill, not stare at other men, But other men will come to you in need.

To the question “Why should I give the food reserve I count on for the question “Why should I give the food reserve I count on for my own security (my liquidity) to someone who has come to me in need?”, the answer is--interest. Instead of lying in a barn, subject to wastage by molds and vermin, the barley I have provided will return to me, after the allotted span, intact and even with a surplus.

The Classical World. As the new city-states grew, prospered, and expanded their trade, they had to confront the evident difficulty of using a wasting asset, such as grain, as the general monetary medium for making loans and settling debts. A precious metal--copper, silver, or gold--soon assumed this function, and temple treasuries served as the first banks. By the 6th century B.C. coined money had come into general use. Along with monetization went an expansion in the sphere of activities financed through interest-bearing loans, from the consumption and wage-paying requirements of farmers in the pre-harvest months to the luxury purchases of estate-owners and the urban rich, the far-flung commerce of merchants and shipowners, the wars of kings and tyrants, and the tax burden on the urban middle classes. But from the outset interest also proved to be the source of extreme social tensions, a powerful engine of economic accumulation and social inequality.

A debtor who could not repay his loan might extend it, with the consent of the creditor, but a few compoundings of the interest due would quickly make the loan quite unre-payable. And the penalty for default was severe indeed--the unfortunate bankrupt forfeited both his land and his freedom. If lucky, he would be permitted to work his former property as a share-cropper. At worst, he would be enslaved. In every city-state, once debt, interest, and money had become major factors in people's lives, it was not long until much of the population had been reduced to landlessness and bondage. But since the armed forces of these cities consisted of self-supporting citizen-soldiers, the fall of so many from the ranks of free citizens was not merely a source of internal discontent--much worse, it was a source of military weakness and thus a grave peril to the state's very existence.

Various measures were taken to counter this dangerous effect of compound interest. In Babylon, and many other Middle Eastern cities, the term of debt-servitude was limited to seven years, interest rates were regulated by law, and the debtor's title to his land was given a degree of protection. The Israelites added the Jubilee Year--every 50th year all debt-slaves were to be freed and all lands forfeited to creditors returned to their original owners. Athens, in the Solonic reform of 594 B.C., freed all debt-slaves, canceled all debts, and outlawed debt-bondage^ In Rome, at the start of the 5th century B.C., the “secession” of the plebeians--a formal threat of civil war--forced the city's patrician rulers to establish written laws regulating debt and interest and mitigating, though not abolishing, debt-bondage. But neither political regulation of interest and debt nor a long-term decline in interest rates--from around 20 percent in the 6th century B.C. to between 4 and 8 percent at the start of the present era--could stop the general consolidation of peasant free-holdings into large estates worked by slave labor.

Although it lasted for many centuries, the complex commercial civilization of the Classical world, with its great merchant and banking houses in such cosmopolitan centers as Babylon, Rome, Alexandria, Corinth, and Carthage, did not survive the barbarian invasions that destroyed the Western Roman Empire in the third and fourth centuries A.D. It was replaced throughout Europe and around the Mediterranean by a new form of feudalism, with far less need for money and interest-bearing credit.

The Middle Ages. In the early medieval period, the Church was the main moneylender in Europe. It made loans to nobles and princes, who needed money to finance their imports of luxury goods and their wars and who put up land as collateral. Interest was not charged on these loans, but if the borrower defaulted he forfeited his lands. The ability to withhold credit gave the Church considerable power, and property acquired from defaulting noblemen helped make the Church the biggest feudal landlord throughout Europe. Jewish merchants were also important sources of credit, not only in Europe but throughout the Muslim lands from Baghdad to Toledo.

As European commerce returned to life, in the nth, 12th, and 13th centuries, credit relations became more widespread and loans for commercial, as opposed to consumption, purposes became more common. The officials and institutions of the Church now were much more likely to become debtors than creditors. By the end of the 12th century the Church had declared “usury” (the taking of interest) a grave sin, to be punished by excommunication. This magnified the role of Jewish lenders.

The Black Death, which wiped out more than half the population of Europe during the 14th century, greatly enhanced the bargaining power of the surviving laborers and thus decisively undermined the feudal order. Especially in England, feudal domains gave way to rent-paying farmers who paid money wages to their workers and sold their products, especially wool, on broad markets. These capitalistic enterprises were the first to finance large-scale production, as distinct from commerce or consumption, through interest-bearing debt. In the 15th century the Northern Italian (“Lombard”) bankers, the most famous of whom were the Medici of Florence, developed sophisticated international banking operations. They had representatives, took deposits, and made commercial loans throughout Europe--including long-term loans to English wool-growers.

In early medieval times, the credit standing of kings and lords was so poor that moneylenders, except for the Church, avoided making loans to them whenever possible. Later, however, large loans were made to sovereigns and lords-- but at rates of interest high enough to reflect the great risk of lending to borrowers whose military power made it easier for them to default with legal, if not economic, impunity. This was a particular problem for the Jews, because popular anti-Semitism, fostered by the Church and heightened by popular resentment against moneylenders as a class, made it all too easy and frequent for kings and bishops to repudiate debts to, extort forced loans from, or even physically expel their Jewish creditors. Reflecting this greater security for business loans as against loans to rulers, in the 14th century interest rates on commercial loans in Italy, France, and the Netherlands ranged from 5 to 25 percent, whereas rates on loans to princes and bishops in the same areas ranged from 15 to 80 percent.

From the Age of Exploration (16th and 17th centuries), through the Industrial Revolution of the 18th and 19th centuries, and into modern times, banking and monetary systems grew ever more flexible and sophisticated. Interest-bearing debt, throughout the industrialized world, progressively acquired its now-dominant role in financing industrial investment and production, construction, and mass consumption of manufactured goods.

CONTEMPORARY FORMS OF INTEREST

There are many different types of credit for which interest is paid. As a result, there are many forms of interest.

A straight loan is a form of credit with which many people are familiar through their loans to banks (bank accounts), on which interest is received at set intervals and the principal can be recovered at notice. Examples are many forms of savings accounts and, more recently, checking accounts as well.

Another type of loan involves payment of interest at set intervals and of principal at a given date, or term. Many bonds, corporate and government, are term loans. The real interest return is determined by a combination of periodic payments plus the final payment of principal. Thus, where a bond is bought below its redemption (or par) value, the interest return is equal to the periodic interest payments plus the gain realized when the bond matures and is redeemed. Similarly, if the bond is bought at a premium (above its redemption value), then the interest return will similarly be below the value of the periodic interest payments alone. Computation of the true interest rate on such securities is a mathematically complicated procedure. However, tables giving the return on any such bond are readily available.

Some bonds pay both the principal and interest at term. U.S. government Series E savings bonds take this form.

In another common form of loan the borrower makes fixed payments periodically at a set interest rate, so balance owed declines steadily. Conventional fixed-rate mortgages and most consumer installment loans are of this type. People get interest in this way when they purchase annuities.

During the later 20th century there have been many innovations in forms of interest. Since interest rates have fluctuated widely during these years, many loans tie interest payments to short-term commercial interest rates. Payments can vary greatly over the lifetime of such a loan, but always in a way that protects the lender. One example is a variable (adjustible)-rate-mortgage, which itself can come in a number of forms. Essentially, the interest that the borrower pays will change periodically in step with market interest rates. Sometimes the amount that the rate can change per year is limited and the total amount that it can change over the life of the mortgage is also limited. In other cases there are no limitations. The starting interest rate on these mortgages is lower than for a corresponding fixed-rate mortgage because the borrower bears a greater risk from changes in rates.

Another form of interest with which many consumers are familiar is paid on credit card (“revolving credit”) loans. The interest rate is fixed on such loans, but, except for a minimum percentage of the outstanding balance that must be paid monthly, the borrower determines the amount to be repaid.

There are many ways in which the true interest charges may be hidden. Annual fees for the use of credit cards are an example, as are “points” that must be paid when taking out a mortgage, each “point” being equal to one percent of the mortgage's face value. In the United States, “truth in lending” laws require lenders to inform borrowers of the interest rate they are actually paying, taking account of such hidden costs.

Supply, Demand, and Inflation

Much thinking about inflation is rooted in the concept of the market elaborated by Adam Smith in the mid-i8th century. The mechanisms that rule the market, as Smith described it, are supply and demand, and prices hinge on the relation between the two. When the demand--that is, desire backed up by buying power--for a certain kind of merchandise exceeds the supply, its cost rises. This, however, is not the misfortune it might seem to be, at least according to Smith and his followers. Because the item brings more income to its producers, more people attempt to produce it. This in turn increases supply until it outstrips demand. Producers must now compete by lowering their prices. If 20 million families lived in a country with only 10 million refrigerators and each family attempted to outbid the others for them, the price of a refrigerator might be very high. But if, in consequence of the high price, more workmen and money were to be drawn into the refrigerator business and an additional 20 million units were to be manufactured, a “buyer's market” would eventually result, causing the price of refrigerators to plunge.

Other economists, however, deny that supply and demand really do have the effect that Smith attributed to them. This is not necessarily a moral criticism of the selfishness that animates the market; they simply assert that the ruling powers of private enterprise economies have in fact liberated themselves from the restraints of supply and demand.

In any case, whatever the relation between supply, demand, and prices, it must be understood that the “supply” of an economy as a whole is its total output--meaning the volume of goods and services produced by the entire economy. Changes in this output from one period to another must be measured by means that enable us to distinguish between real growth in the volume of goods and services produced and apparent growth due simply to inflation. We can do this by differentiating the “real income” due to production from the “nominal” or “money income.” Nominal income is obvious enough: It is the value of an economy's total production at the prices it actually does fetch when sold. If, however, the general price level changes, the purchasing power of the money embodied in nominal income will also change. Consequently, a rise (or fall) in nominal income does not indicate how much of any increase (or decrease) occurring from year to year was due to increased (or decreased) production of goods and services and how much to inflation (or to its opposite, deflation). We can find out, however, by recalculating the income from two or more years that we wish to compare to make the purchasing power of money equal in all of them.

Suppose, for example, that in one year an imaginary economy generated a nominal income of $20 billion. Five years later its nominal income had risen to $25 billion. It will be most simple if we use the dollar's value in the first year as the base for our calculations. (In principle, however, any other year would serve just as well.) In this year, in other words, $1 = $1, and both the economy's nominal and its real income amounted to $20 billion. When its nominal income had risen to $25 billion, however, its currency had lost, say, 20 percent of its value as a result of a corresponding rise in the general level of prices, so that % 1 = $0.80. The economy's real income in the latter year was therefore only $20 billion. Inflation generated the whole of the increase in its nominal income; the production of goods and services did not rise at all.

The Future of Chinese Economy

China now plays a much bigger role in the world economy and its importance is likely to increase further. Angus Maddison has tried to assess why and how this acceleration occurred and to throw light on future potential. He has also made a considerable effort to recast the estimates of Chinese GDP growth to make them conform to international norms.

In order to understand contemporary China it is useful to take a long comparative perspective. In many respects China is exceptional. It is and has been a larger political unit than any other. Already in the tenth century, it was the world's leading economy in terms of per capita income and this leadership lasted until the fifteenth century. It outperformed Europe in levels of technology, the intensity with which it used its natural resources and its capacity for administering a huge territorial empire. In the following three centuries, Europe gradually overtook China in real income, technological and scientific capacity. In the nineteenth and first half of the twentieth century, China's performance actually declined in a world where economic progress greatly accelerated. A comparative analysis of Chinese performance can provide new perspectives on the nature and causes of economic growth. It can help illuminate developments in the West as well as in China. In the past, analysis of economic progress and its determinants has had a heavy Eurocentric emphasis. Assessment of the Chinese historical record has been highly Sinocentric. A more integrated view can illuminate both exceptionalism and normality and provide a better understanding of the reasons for the rise and decline of nations. China is likely to resume its role as the worlds largest economy by 2015

Adoption of more distant horizons can clarify causal processes. Growth analysis has concentrated on the past two centuries of capitalist development in which rapid technical change, structural transformation and rising per capita incomes were the norm. Earlier situations where per capita income was fairly static are usually neglected because it is assumed there was no technical change. But extensive growth -- maintaining income levels whilst accommodating substantial rises in population -- may also require major changes in the organisation of production. Technological progress needs to be interpreted broadly. It should not be restricted to advances in machinofacture, but should encompass innovations in administration, organisation and agricultural practice. A long view can also help understand China's contemporary policies and institutions. Echoes from the past are still important.

China was a pioneer in bureaucratic modes of governance. In the tenth century, it was already recruiting professionally trained public servants on a meritocratic basis. The bureaucracy was the main instrument for imposing social and political order in a unitary state over a huge area. The economic impact of the bureaucracy was very positive for agriculture. It was the key sector from which they could squeeze a surplus in the form of taxes and compulsory levies. They nurtured it with hydraulic works. Thanks to the precocious development of printing they were able to diffuse best practice techniques by widespread distribution of illustrated agricultural handbooks. They settled farmers in promising new regions. They developed a public granary system to mitigate famines. They fostered innovation by introducing early ripening seeds which eventually permitted double or triple cropping. They promoted the introduction of new crops -- tea in the T'ang dynasty, cotton in the Sung, sorghum in the Yuan, and new world crops such as maize, potatoes, sweet potatoes, peanuts and tobacco in the Ming.

Agricultural practice compensated for land shortage by intensive use of labour, irrigation and natural fertilisers. Land was under continuous cultivation, without fallow. The need for fodder crops and grazing land was minimal. Livestock was concentrated on scavengers (pigs and poultry). Beef, milk and wool consumption were rare. The protein supply was augmented by widespread practice of small-scale aquaculture.

Agriculture operated in an institutional order, which was efficient in its allocation of resources and was able to respond to population pressure by raising land productivity. Landlords were largely non-managerial rentiers. Production and managerial decisions were made by tenants and peasant proprietors who could buy and sell land freely and sell their products in local markets

Shopping Mall

Today's shopping mall has as its antecedents historical marketplaces, such as Greek agoras, European piazzas, and Asian bazaars. The purpose of these sites, as with the shopping mall, is both economic and social. People go not only to buy and sell wares, but also to be seen, catch up on news, and be part of the human drama. Both the marketplace and its descendant the mall might also contain restaurants, banks, theaters, and professional offices.

The mall is also the product of the creation of suburbs. Although villages outside of cities have existed since antiquity, it was the technological and transportation advances of the 19th century that gave rise to a conscious exodus of the population away from crowded, industrialized cities toward quieter, more rural towns. Since the suburbs typically have no centralized marketplace, shopping centers or malls were designed to fill the needs of the changing community, providing retail stores and services to an increasing suburban population.

The shopping mall differs from its ancient counterparts in a number of important ways. While piazzas and bazaars were open-air venues, the modern mall is usually enclosed. Since the suburbs are spread out geographically, shoppers drive to the mall, which means that parking areas must be an integral part of a mall's design. Ancient marketplaces were often set up in public spaces, but shopping malls are designed, built, and maintained by a separate management firm as a unit. The first shopping mall was built by J. C. Nichols in 1922 near Kansas City, Missouri. The Country Club Plaza was designed to be an automobile-centered plaza, as its patrons drove their own cars to it, rather than take mass transportation as was often the case for city shoppers. It was constructed according to a unified plan, rather than as a random group of stores. Nichols' company owned and operated the mall, leasing space to a variety of tenants.

The first enclosed mall was the Galleria Vittoria Emanuele in Milan, Italy in 1865-77. Inspired by its design, Victor Gruen took the shopping and dining experience of the Galleria to a new level when he created the Southdale Center Mall in 1956. Located in a suburb of Minneapolis, it was intended to be a substitute for the traditional city center. The 95- acre, two-level structure had a constant climate-controlled temperature of 72 degrees, and included shops, restaurants, a school, a post office, and a skating rink. Works of art, decorative lighting, fountains, tropical plants, and flowers were placed throughout the mall. Southdale afforded people the opportunity to experience the pleasures of urban life while protected from the harsh Minnesota weather.

In the 1980s, giant megamalls were developed. While Canada has had the distinction of being home to the largest of the megamalls for over twenty years, that honor will soon go to Dubai, where the Mall of Arabia is being completed at a cost of over five billion U.S. dollars. The 5.3 million square foot West Edmonton Mall in Alberta, Canada, opened in 1981, with over 800 stores, 110 eating establishments, a hotel, an amusement park, a miniature-golf course, a church, a zoo, and a 438-foot-long lake. Often referred to as the “eighth wonder of the world,” the West Edmonton Mall is the number-one tourist attraction in the area, and will soon be expanded to include more retail space, including a facility for sports, trade shows, and conventions. The largest enclosed megamall in the United States is Bloomington, Minneapolis's Mall of America, which employs over 12,000 people. It has over five hundred retail stores, an musement park which includes an indoor roller coaster, a walk-through aquarium, a college, and a wedding chapel. The mall contributes over one billion dollars each year to the economy of the state of Minnesota. Its owners have proposed numerous expansion projects, but have been hampered by safety concerns due to the mall's proximity to an airport.

The Economy of Ancient Greece

Introduction

The ancient Greek economy is somewhat of an enigma. Given the remoteness of ancient Greek civilization, the evidence is minimal and difficulties of interpretation abound. Ancient Greek civilization flourished from around 776 to 30 B.C. in what are called the Archaic (776-480), Classical (480-323), and Hellenistic (323-30) periods.2 During this time, Greek civilization was very different from our own in a variety of ways. In the Archaic and Classical periods, Greece was not unified but was comprised of hundreds of small, independent poleis or “city-states.” During the Hellenistic period, Greek civilization spread into the Near East and large kingdoms became the norm. Throughout these periods of ancient Greek civilization, the level of technology was nothing like it is today and values developed that shaped the economy in unique ways. Thus, despite over a century of investigation, scholars are still debating the nature of the ancient Greek economy.

Moreover, the evidence is insufficient to employ all but the most basic quantitative methods of modern economic analysis and has forced scholars to employ other more qualitative methods of investigation. This brief article, therefore, will not include any of the statistics, tables, charts, or graphs that normally accompany economic studies. Rather, it will attempt to set out the types of evidence available for studying the ancient Greek economy, to describe briefly the long-running debate about the ancient Greek economy and the most widely accepted model of it, and then to present a basic view of the various sectors of the ancient Greek economy during the three major phases of its history. In addition, reference will be made to some recent scholarly trends in the field.

Sources of Evidence

Although the ancient Greeks achieved a high degree of sophistication in their political, philosophical, and literary analyses and have, therefore, left us with a significant amount of evidence concerning these matters, few Greeks attempted what we would call sophisticated economic analysis. Nonetheless, the ancient Greeks did engage in economic activity. They produced and exchanged goods both in local and long distance trade and had monetary systems to facilitate their exchanges. These activities have left behind material remains and are described in various contexts scattered throughout the extant writings of the ancient Greeks.

Most of our evidence for the ancient Greek economy concerns Athens in the Classical period and includes literary works, such as legal speeches, philosophical dialogues and treatises, historical narratives, and dramas and other poetic writings. Demosthenes, Lysias, Isokrates, and other Attic Orators have left us with numerous speeches, several of which concern economic matters, usually within the context of a lawsuit. But although these speeches illuminate some aspects of ancient Greek contracts, loans, trade, and other economic activity, one must analyze them with care on account of the biases and distortions inherent in legal speeches.

Philosophical works, especially those of Xenophon, Plato, and Aristotle, provide us with an insight into how the ancient Greeks perceived and analyzed economic matters. We learn about the place of economic activities within the Greek city-state, value system, and social and political institutions. One drawback of such evidence, however, is that the authors of these works were without exception members of the elite, and their political perspective and disdain for day-to-day economic activity should not necessarily be taken to represent the views of all or even the majority of ancient Greeks.

The ancient Greek historians concerned themselves primarily with politics and warfare. But within these contexts, one can find bits of information here and there about public finance and other economic matters. Thucydides, for example, does takes care to describe the financial resources of Athens during the Peloponnesian War.

Poems and dramas also contain evidence concerning the ancient Greek economy. One can find random references to trade, manufacturing, the status of businessmen, and other economic matters. Of course, one must be careful to account for genre and audience in addition to the personal perspective of the author when using such sources for information about the economy. The plays of Aristophanes, for example, make many references to economic activities, but such references are often characterized by stereotyping and exaggeration for comedic purposes.

One of the most extensive collections of economic documents is the papyri from Greek-controlled Egypt during the Hellenistic period. The Ptolemaic dynasty that ruled Egypt developed an extensive bureaucracy to oversee numerous economic activities and like all bureaucracies, they kept detailed records of their administration. Thus, the papyri include information about such things as taxes, government-controlled lands and labor, and the unique numismatic policies of the Ptolemies.

Epigraphic evidence comes in the form of stone inscriptions from public and private institutions. Boundary markers placed on land used as security for loans, called horoi, were often inscribed with the terms of the loans. States such as Athens inscribed honorary decrees for those who had done outstanding services for the state, including economic ones. States also inscribed accounts for public building projects and leases of public lands or mines. In addition, religious sanctuaries frequently inscribed accounts of monies and other assets, such as produce, land, and buildings, under their control. Although accounts tend to be free of human biases, honorary decrees are much more complex and the historian must be careful to consider the perspective of their issuing institutions when interpreting them.

Archaeological evidence is free of some of the representational complexities of the literary and epigraphic evidence. Pottery finds can tell us about pottery manufacture and trade. The vase types indicate the goods they contained, such as olive oil, wine, or grain. The distribution of finds of ancient pottery can, therefore, tell us the extent of trade in various goods. Finds of hoarded coins are also invaluable for the information they reveal about the volume of coins minted by a given state at a given time and the extent to which a state's coinage was distributed geographically. But such archaeological evidence is not without its drawbacks as well. The same “muteness” that frees such evidence from human biases also makes it incapable of telling us who traded the goods, why they were traded, how they were traded, how much they cost, and how many middlemen they went through before reaching their find spots. Furthermore, it is always dangerous to attempt to extrapolate broad conclusions about the economy from a small number of finds, since we can never be sure if those finds are representative of larger phenomena or merely exceptional cases that archaeologists happened to stumble upon.

Some of the most spectacular and informative finds in recent years have been made under the waters of the Mediterranean, Aegean, and Black Seas by what is known as marine (or nautical) archaeology. Ancient shipwrecks containing goods for trade have opened new doors to the study of ancient Greek merchant vessels, manufacturing, and trade. Although the field is relatively new, it has already yielded much new data and promises great things for the future.

The Debate about the Ancient Greek Economy

As stated above, the ancient Greek economy has been the subject of a long-running debate that continues to this day. Briefly stated, the debate began in the late nineteenth century and revolved around the issue of whether the economy was “primitive” or “modern.” These were a poor choice of terms with which to conceptualize the ancient Greek economy and are to a great extent responsible for the intractability of the debate. These terms are clearly normative in character so that essentially the argument was about whether the ancient Greek economy was like our “modern” economy, which was never carefully defined, but apparently assumed to be a free enterprise, capitalistic one with interconnected price-making markets. In addition, confusion arose over whether the ancient Greek economy was like a modern economy in quantity (scale) or quality (its organizing principles). Lastly, such terms clearly attempt to characterize the ancient Greek economy as a whole and do not distinguish differences among regions or city-states of Greece, time periods, or sectors of the economy (agriculture, banking, long distance trade, etc.).