The language used by economists confuses many people—including themselves. Imprecise usage of words and phrases leads to poor communication and flawed thinking. Test the meaning of everything you hear or read about economics and free markets.
I have lifted the title of this post from the title of a chapter in Science and Sanity by Alfred Korzybski. Korzybski deserves credit for establishing the discipline referred to as General Semantics. I may refer to General Semantics in future posts. General Semantics might be described as a discipline that studies the effect of language on human behavior. Korzybski talks about how changes in language can change people’s behavior and some parts of our language require change in order to stimulate new and more effective the behavior.
Korzybski refers to three important thinkers who have influenced our thinking through the ages and continue to today: Aristotle, Euclid, and Newton. The words that we use to describe the thinking of these three mental giants tend to lead us to linear, cause-and-effect, thinking. Korzybski advocates that based on the new knowledge about our world that we need to shift our language to reflect non-Aristotelian, non-Euclidean, and non-Newtonian, thinking. We now live in a world in which A is not always A, straight lines only exist in concept, and gravity no longer acts instantaneously over distance.
The language used in economics and the description of free markets still reflects the old linear, cause-and-effect, thinking. We need to learn how to use language more accurately in order to reflect the reality of the human systems we call markets.
Out of the many words used in economic lexicon I have chosen four to demonstrate how their usage can frequently confuse people’s understanding.
Readers of my blog know that I make frequent references to value. I do so because it lies at the core of economic thinking.
Commonly economists refer to value as something that a person can measure, record, and calculate. The scientific use of value coincides with this meaning.
Economics, however, refers to human systems in which the word value takes on an entirely different meaning. In that context it becomes a subjective judgment limited to the mind of the individual. We cannot measure or calculate value. We can only measure human action based on value.
The word demand, in popular usage, has several different meanings. Economists make that meaning only slightly more precise, and in some cases totally confusing. In many cases they give the impression that the existence of more people creates more demand. They also described demand as something that can be plotted on a diagram to which suppliers will respond.
Demand only exists when a person brings something of value (to the other party) and offers it in exchange. Without something to exchange demand cannot exist. In addition, the notion that demand can be plotted ex-ante is almost ridiculous. Ask two people who just completed an exchange what the demand curve looked like before they made the exchange.
The word aggregate frequently appears in economic writing and conversation. Frequently economists refer to aggregate demand, aggregate income, or aggregate employment. The term conveys the underlying assumption that these generalized concepts can be summed in some meaningful way.
Summing individual demand, individual income, or individual employment, amounts to a mathematical or logical impossibility. The idea that we can add these things defies logic and insults the importance of individual responsibility and decision.
If you look up the term “inflation” in an economics textbook or dictionary, you will usually find it defined as a general rise in prices. When economists start discussing the causes of these general rises in prices, they refer to things like wage inflation, consumer price inflation, or other types of price inflation.
A rise in the general price level (meaning a generalized increase in the prices of individual products) can, in fact, occur. But, the cause has only a single source: monetary expansion. Without an expansion of the money supply, when the price of one good goes up, the price of some other good or goods must go down.
Rising prices caused by monetary expansion create a distortion in the information flow transmitted by the mechanism of prices.
The concept of interest confuses a lot of people, including those involved in financial transactions. The traditional concept of interest relies on the relative productivity of capital. The productivity of capital does have an influence, but this really confuses the issue. It makes it a little hard to explain interest charged for the purchase of consumer items.
A simpler and more straightforward explanation of interest deals with time preferences. A good in the present always has more value than the very same good in the future. Thus, in order to entice a person to exchange a current good for a future good, a greater quantity of the future good must be offered. Interest consists of the difference between the amount of the current good and the amount of the future good in an exchange.
The reader should note that the amount of interest, and the interest rate, depend on the two independent variables involved in the exchange. No one can change interest rates independent of those two variables. The Fed, for example, cannot control interest rates.
Practitioners of the hard science have the luxury of creating new language to describe their principles and theories. After all, who do cosmologists speak to other than other cosmologists. Economists, on the other hand, do not have that luxury. They talk to other humans about human activities. Yet, they need to promote certain level of precision in the language they use.
When you listen to, or read, the words of an economist take care not to interpret what they say based on the normal meaning of those words. Do they give the same meaning to these words that you do? And, possibly more importantly, do they introduce a certain level of inconsistency into their own thinking by using the common meaning of the words?
I can’t expect to cause linguistic revision just by pointing out a few words that I call into question. But I would hope to encourage readers to question the words that people use in describing free markets. Do they really mean what you think they mean? Do they really make sense?
In closing, consider these two phrases:
Innocent until proven guilty.
Innocent unless proven guilty.
Which words would you use?