There’s a reason the first section of my forthcoming book on debt is all about language. I believe that our thoughts are only as clear as the meanings of the words we use to express them. When it comes to debt and related topics, we are not at all clear on meanings, and our confusion is costing society dearly. A few arguments I’ve been having recently have confirmed my position.
First, I had a long discussion with Frances Coppola on Twitter, which turned into a debate about whether or not there is such thing as ‘the labour market’. I said no, defining a ‘market’ as a price-mechanism for adjusting supply to match demand (there can be thwarting influences that prevent the mechanism from actually bringing about this end). With labour, I believe, there is no such mechanism, thwarted or otherwise. I agree with Keynes that wages and the volume of employment are a complex function of interest rates, expectations, and the average price-level – not of the supply and demand for labour.
Coppola accused me of not knowing what a market is. Later she revised this to a claim that I’m stuck within an old-fashioned ‘classical’ concept. I asked for her own definition of ‘market’, which turned out to be ‘a venue in which buyers and sellers meet’. Of course that is one sense of the term ‘market’; in ‘Borough Market’ the term is used in just that way. But clearly it’s not the sense I intended; Coppola’s problem is that she admits it as the only legitimate sense. I’m not sure what she then makes of sentences in the newspaper such as: ‘The market for tea is growing in the world’s coffee producing countries’ or ‘The markets have responded well to the Federal Reserve’s recent announcement’. Clearly the first does not mean that some particular venue is expanding, and venues don’t respond to announcements by the Fed; they just stand there until something knocks them over.
Perhaps Coppola will accuse the journalists of systematic falsehood; perhaps she’ll line them up behind me to be chastened for failing to understand what a market is. The fact is, I was employing a perfectly accepted sense of ‘market’, and Coppola cannot intelligibly claim that we’re all wrong about what ‘market’ means, since there is no fact about what words mean that goes beyond what they’re generally taken to mean. As Wittgenstein argued so forcefully, meaning is not purely subjective, but nor is it objective; it is intersubjective: what X means just is what X is generally accepted to mean.
Another example comes from various discussions I’ve had about my last post debunking the term ‘government borrowing’. There is, some say, a perfectly good sense in which the relevant fiscal operations can be described as ‘borrowing’. No doubt there is, but the problem is that people generally take ‘borrowing’ to mean something quite different, and this leads them to make false judgements about the consequences of government borrowing. People in general take ‘borrow’ to mean what it means in a sentence like ‘John borrowed Jane’s lawnmower’. From this, we can infer various things, including that Jane will be deprived of the use of her mower while it’s on loan to John, and that there is a risk that she might not get her mower back, say if John loses or breaks it.
When we say that the government, by selling gilts to the public, borrows their savings, it is natural to think the word is being used in the same sense, and to then draw the equivalent inferences: that the public won’t be able to make use of their savings while they’re on loan to the government, and that there’s a risk that they won’t ever get their savings back. Both of these inferences are regularly made in common political discourse. The notion that the public can’t use its savings while they’re on loan to the government underpins the ‘crowding out’ argument against government deficits. The notion that the public might lose its savings backs up the rhetoric about the risk of government bankruptcy.
Neither inference is justified. When I swap my cash savings for an interest-bearing Treasury gilt, I don’t at all lose the use of my savings. Not only can I spend the gilt directly in many cases, I can also pledge it as collateral, borrow the equivalent cash value, and then spend the cash. It is not at all like Jane and her lawnmower. You might try to make the cases analogous by imaging that all lawnmowers are identical and John issues an IOU when he borrows Jane’s mower. Jane can then pledge his IOU as collateral and borrow another mower for herself. But the analogy breaks down when we consider that whoever lends Jane a mower is then deprived of the use of it, whereas when a bank loans me money it creates the deposit ex nihilo. A mower can’t be loaned without somebody losing her mowing power; money can be loaned without anyone losing their spending power. The ‘crowding out’ argument is premised on denying this distinction.
The idea that people can lose their savings by loaning them to the government overlooks the fact that gilts and bank reserves are both government liabilities (reserves are central bank liabilities nominally backed by government debt). The government can issue as many IOUs as people are willing to hold, in whatever forms they wish to hold them. If they want to hold cash, the government can issue the cash (reserves to the banks). If they want to hold gilts, it can issue the gilts. If Jane is the monopoly issuer of lawnmowers, and can produce them instantaneously at zero cost to herself, then the analogy holds, otherwise not.
I am not, therefore, interested in arguments about whether there is some sense in which it is correct to call deficit spending government ‘borrowing’. One cannot bestow meaning upon a word by simply deciding what it should mean. Again, meaning is intersubjective: what a term means is what it is generally taken to mean. People generally take ‘borrow’ to mean what it does in ‘John borrowed Jane’s lawnmower’. When it is stated that the government borrows, they take ‘borrow’ in the same sense. Then they make false inferences. Then they make poor political decisions. That’s what I’m trying to help us to avoid.