Economics and Semantics

wordsthingsThere’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 mowerlawnmower’. 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.

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36 thoughts on “Economics and Semantics

  1. NeilW

    I see the general sense of borrowing people mean is that the government has unwillingly dragged the money kicking and screaming out of somebody’s mitts by the promise of a massive interest payment (!).

    In other words it is a pull operation by the government, with them enticing people to bid for their paper.

    When in reality it is a push operation with the people desperately wanting the government to take their money and give them something that pays a risk free return.

    We know this, because when governments run a surplus – as they did in Australia – there is huge moaning from the private sector about the lack of risk free returns *and bonds continue to be issued when there is demonstrably no ‘funding’ need*.

    “The long history of bid-to-cover ratios in Australia tells us that the bond markets cannot get enough public debt. When debt levels start falling below some level (that will provide liquidity to futures markets, for example) the private bond traders demand the government issues more debt even if they are running surpluses.” http://bilbo.economicoutlook.net/blog/?p=30205

    A government that is issuing ‘debt’ when it has no need cannot be said to be borrowing as a matter of logic.

    Reply
    1. axdouglas Post author

      Well, yes: the best thing about getting rid of the idea of government ‘borrowing’ is that we can think clearly about the functions that bonds actually have, now that we know they’re *not* a means of financing government spending.

      Reply
  2. Ramanan

    “which turned into a debate about whether or not there is such thing as ‘the labour market’. I said no,”

    What a confused post!

    Markets aren’t defined by a price-mechanism that you are implicitly assuming in your definition. Economists exaggerate the price mechanism and use phrases such as “the magic of prices”. But that only means they are confused. It does not mean that the phrase labour market itself is wrong.

    And what is your correct phrase for “labour market”? “Labour non-market?”

    And price mechanism is exaggerated in other markets as well. So we stop calling them markets?

    Comments on your mega-confused rant on “government borrowing” for another day.

    Reply
    1. axdouglas Post author

      Read over what you just wrote. You write that markets are NOT defined in such-and-such a way, and your next sentence accuses economists of defining them in precisely that way. So clearly markets ARE defined in that way, rightly or wrongly, by economists. I’m just conforming to their usage.

      I am NOT endorsing their theory that there actually ARE markets in that sense, except to say that there at least is not one for labour. All I am endorsing is a relatively widespread definition of the word ‘market’.

      Is there a labour market in some other sense of the word ‘market’? Obviously yes. That in no way is relevant to my claim.

      I can agree with your definition of ‘leprechaun’ without endorsing any theory about whether there are or are not any leprechauns.

      Defining a word is not endorsing any theory about the referent of that word, except the trivial theory that it is (if it exists) the referent of that word.

      Otherwise the Ontological Argument would be valid.

      So where is the confusion?

      Reply
      1. Ramanan

        Your confusion is that while you correctly say that there is less role for the price mechanism, you extrapolate it to think that the word “labour market” itself is wrong.

        “Is there a labour market in some other sense of the word ‘market’? Obviously yes. That in no way is relevant to my claim.”

        Read your own quote quoted by me in my first comment where you say there is no such thing a as a labour market.

      2. axdouglas Post author

        Are you being deliberately obtuse? Compare:

        ‘There are no leprechauns.’
        ‘Yes there are! In my language, “leprechaun” means “dog”.’
        ‘Ok, in that sense there are leprechauns.’
        ‘HAHA! Now read your first comment about how there are no leprechauns. You’re WRONG! GOTCHA!’

        Grow up.

      3. axdouglas Post author

        ‘There is a labour market’ is true in some senses of the word ‘market’ and false in others.

        Words can have various senses, no one of which is ‘the right one’. If a term is ambiguous, you may have to clarify which sense you intend before the truth of your claim can be assessed. I have now done so. Nobody is being ‘called out’. Settle down.

      4. axdouglas Post author

        ‘There is a ball in that room’ is true if ‘ball’ is taken in the sense of meaning ‘dance’ and false if ‘ball’ is taken in the sense of meaning ’round toy’.

        TRYING TO HAVE IT BOTH WAYS!!!!

        Um, no. Try thinking about it a little bit.

  3. Frances Coppola (@Frances_Coppola)

    So, you still don’t know what a market is. Defining “market” as a price mechanism is metonymy, I’m afraid – mistaking the container for the thing contained. A market is a place where buyers and sellers meet: price changes are a consequence of the behaviour of those buyers and sellers. Price is thus a function of trading, not of “markets”.

    We loosely talk about markets “reacting” to news, but this is also metonymy, of course: what we actually mean is that buyers and sellers in the market adjust their behaviour in response to the news, and this affects prices.

    Reply
    1. justaluckyfool

      Perhaps, a “market” is where an exchange is made “…of SOMETHING for ANYTHING…”.
      It could be a physical place, or a key stroke. News about any particular market is only a testimony of what SOMETHING has been exchanged for what ANYTHING.
      The vehicle for exchange is either the actual items (Barter) or an acceptable NOTHING (That is what is called money…SODDY,”Money now is the Nothing you get for SOMETHING before you can get ANYTHING.”

      Comments by Justaluckyfool ( http://bit.ly/MlQWNs )
      ( “You are always welcome to share, copy, plagiarize, improve, etc..any comments.)
      Read and challenge:
      Frederick Soddy writings, namely “The Role Of Money”
      (Entire book as a free download…) http://archive.org/details/roleofmoney032861mbp

      Reply
    2. grkstav

      Have you ever heard or read of “price-making markets”? Are you familiar with markets (in your definition) in which prices are fixed and unchangeable?

      Do the terms “supply crowd” and “demand crowd” ring any bells?

      “A market is _a place_ where buyers and sellers meet” is a profoundly problematic definition of how the term “market” is actually used. Moreover, it is clearly the case that prospective/intended buyers and sellers “meet” in markets, and there is guarantee that matches between and among them will materialize.

      Saying “we loosely talk about markets” and complaining of metonymy and synecdochy are marks of ignorance about human affairs and human arrangements.

      Reply
  4. axdouglas Post author

    Look, have it your way if you like. I don’t *need* the word ‘market’ to make my claim. My claim is: There is no mechanism by which the aggregate supply of labour is adjusted to aggregate demand with wages working as a price-signal. Instead, nominal wages and the overall volume of labour are the byproducts of price-mechanisms working in other markets: for goods, capital, money, etc.

    You can disagree with my claim; I might well be wrong, and I’d be happy to be told why I’m wrong. I like to learn. But I don’t see how it helps to make the dispute about the meaning of a word. In fact, your making it about that throws our whole disagreement into confusion. I don’t know whether you *disagree* with my claim – whether you think that there IS some adjustment mechanism of the kind described – or whether you agree that there is no such mechanism, but you object to my referring to it using the word ‘market’. If all we disagree about is the correct usage of a term, then there isn’t much point to us arguing. We just need to get clear on our terminology.

    I am disturbed by the way that empirical disputes keep blurring into semantic ones, so that people don’t know whether they disagree about factual claims or merely about the appropriate language by which to express them. But it’s also heartening, in that it confirms how much we still need philosophy to help us get these things clear.

    Reply
    1. Ramanan

      “My claim is: There is no mechanism by which the aggregate supply of labour is adjusted to aggregate demand with wages working as a price-signal.”

      Sorry to interrupt. Fine. The importance of price mechanism is exaggerated by economists. Irrelevant whether to call it the labour market or not.

      Reply
  5. Ramanan

    (Sorry delete my comment in italics.)

    quote: [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.

    People in general take ‘borrow’ to mean what it means in a sentence like ‘John borrowed Jane’s mowerlawnmower’. 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.] end of quote

    Ok let me handle it right away.

    As per your logic even me “borrowing from the bank” shouldn’t be called borrowing. Just used the anti-analogy for borrowing lawnmower. My borrowing from the bank doesn’t reduce someone’s consumption. Why call it borrowing, as per your logic. Stop calling it borrowing, na?

    Same the case with the government. It is people who are confusing and thing of it as borrowing your neighbour’s lawnmower and thinking it is unusable. But the fact that people confuse doesn’t mean we ban the terminology altogether.

    More generally you Neochartalists no zilch about open economy issues. A government in a closed economy has an unlimited borrowing power and there’s some logic to your otherwise confused analysis. It isn’t at the mercy of creditors. But open economy issues completely change the dynamics. A government in an open economy does not possess unlimited borrowing powers. It cannot set interest rates unilaterally ie without considering what’s happening in financial markets. See Turkey. A nation with a weak balance of payments thus has a government which is forced to induce foreigners to hold its debt or else face turmoil in the foreign exchange markets. It is at the mercy of creditors beyond a certain point.

    Reply
  6. axdouglas Post author

    Yes, borrowing from a bank *shouldn’t* be called borrowing, insofar as that fosters another misleading analogy. I think Richard Werner points that out somewhere.

    As for your open economy comments, can you please read what Neil Wilson wrote above about balance of trade with a floating fx currency?

    Reply
    1. Ramanan

      “As for your open economy comments, can you please read what Neil Wilson wrote above about balance of trade with a floating fx currency?”

      The Turkish central bank can set rates to zero – is it?

      Reply
    2. Ramanan

      “Yes, borrowing from a bank *shouldn’t* be called borrowing,”

      Imagine I go to the bank and say I want to borrow. Banker says “No! you can’t borrow”!

      It is you who is playing semantics.

      Reply
      1. axdouglas Post author

        I said it shouldn’t be called borrowing *insofar as that fosters a misleading analogy*. So you have two choices. You can stop using the term. Or you can educate people, so that it no longer fosters the misleading analogy. I prefer the second option, so you can calm down a bit.

        I suggest you get your emotions under control before debating any further. You might find it helps to clarify your thoughts.

      2. Ramanan

        I am cool. You are the one using emotional words/headlines such as “Only Fools and Liars”

        You are just backtracking your claims.

        “I said it shouldn’t be called borrowing *insofar as that fosters a misleading analogy*. So you have two choices. You can stop using the term. Or you can educate people, ”

        Why talk of the first option at all?

      3. axdouglas Post author

        Because the second option might not work. Because others might prefer the first option, even though I prefer the second.

      4. Ramanan

        As in first you simply said:

        “I said it shouldn’t be called borrowing *insofar as that fosters a misleading analogy*”

        and then later added the qualifier:

        “So you have two choices. You can stop using the term. Or you can educate people, ”

        Dilutes your first claim so much that it starts to lose meaning.

      5. axdouglas Post author

        ‘Borrowing’ from a bank is not ‘borrowing’ in the same sense as in ‘borrowing’ a lawnmower. Many people – maybe not you, but *many* people – get confused between the two senses. That’s a problem. People shouldn’t be confused about important things. That’s ALL I’m saying. As for solutions, I’m open to suggestions. Do you really disagree with any of that?

      6. Ramanan

        Me borrowing a lawnmower from a neighbour is in a sense better than borrowing funds from the bank. My neighbour might even invite me for a tea. But if I borrow from my bank, I have to pay interest and loan processing fees. (It’s true that while I use the lawnmower, my neighbour can’t and that the same is not true about money). And I have to earn income to pay back the interest.

        Your point about there being various counterintuitive things is right. But the solution is to not change terminologies. In my experience, the system of national accounts and flow of funds have a good stock-flow consistent and self-consistent way of definitions and way of presenting statistics. In that terminology gross/net borrowing have well defined meanings.

        Even in other fields, there are counter-intuitive things. For example the concept of “work” in physics.

        I do not see any advantage in changing terminologies for personal borrowing. There are some counterintuitive things happening when a government is involved but there again, one has to be careful. Governments in weak nations are at the mercy of international creditors whether or not the exchange rate is fixed or floating.

        You can of course come up with your own terminologies but I find it amusing that you say that borrowing funds from a bank shouldn’t be called borrowing. No, no, no. Like how else would you define me borrowing from the bank in your alternative set of definitions?

      7. axdouglas Post author

        ‘…how else would you define me borrowing from the bank in your alternative set of definitions?’

        Yes, that’s a very good question. The thing is so sui generis. It’s like borrowing a lawnmower in that you take on an obligation, but unlike it in that the thing ‘loaned’ doesn’t exist prior to the loan, at least not in the same sense. That’s what makes it so hard to explain to people – there is no appropriate term in the vernacular by which to describe it.

        The problem is that the voting public don’t think in terms of stock-flow consistency. Otherwise none of the rhetoric about ‘unsustainable’ government borrowing would even get off the ground.

        Again, I don’t have many solutions. My job is just to articulate the problem.

      8. NeilW

        The weakness of the national accounts is that currency areas are not national any more. Governments in weak nations are only ‘at the mercy of international creditors’ because of the rigid adherence to national borders. Once you realise your currency area can shrink within your borders and is dynamically sized you can take action to maintain its firepower within your political control area.

        It’s another example of a rigid viewpoint leading to the wrong conclusion – like using the term ‘borrowing’ from a bank, when actually the process is more like an annual licensing arrangement for using software.

      9. Ramanan

        “The weakness of the national accounts is that currency areas are not national any more. ”

        What’s that supposed to mean really?

        National accountants present the way transactions happen and assets and liabilities created. What’s the weakness?

        Highlight situations in which national accounts is wrong than just simply asserting.

        “It’s another example of a rigid viewpoint leading to the wrong conclusion – like using the term ‘borrowing’ from a bank, when actually the process is more like an annual licensing arrangement for using software.”

        Don’t see the analogy. If I borrow from the bank, I have to pay the principal and interest and charges back. Don’t see why this point is so difficult to accept.

  7. Ramanan

    “‘There is a ball in that room’ is true if ‘ball’ is taken in the sense of meaning ‘dance’ and false if ‘ball’ is taken in the sense of meaning ’round toy’.”

    Again the game of semantics which you accuse others of playing.

    The post was clearly written with the aim of saying that the phrase “labour market” is incorrect but then you shifted goal posts.

    Reply
  8. Ramanan

    “Because the second option might not work. Because others might prefer the first option, even though I prefer the second.”

    Not work? Not work for what?

    There’s a huge band of people in the blogosphere who try to change language to justify their purposes. It has some advantages but there’s an overkill here: such as me borrowing from a bank being term as bad semantics.

    It’s a free world and you are free to use whatever language but I find it ridiculous if you start saying things such as “I didn’t borrow from the bank” in case you took out a loan.

    Reply
  9. phatmattbakert

    Alex wishes to contrast how different government borrowing is from the notion of borrowing a lawnmower, and communicates this clearly. He also communicates clearly why borrowing from a bank is different from borrowing a lawnmower.

    A large part of the post is about the inherent danger in using the word borrowing to mean things that are at their core quite different.

    Rather than challenge his definition of his terms, on his blog, why not use the terms as defined and highlight which logical and economic elements with which you disagree? You may call borrowing from a bank borrowing, and indeed most people do, and that is indeed the whole point of the piece.

    It also would increase the statistical likelihood of your viewpoints being correct if you proofread your posts.

    Reply
    1. Ramanan

      Alex seems to not even accept the phrase personal borrowing from banks as borrowing.

      Finally we all are communicating. You are free to create your own language but it becomes difficult to discuss things if your language is different than mine. So my motivation for commenting here is “look at least agree on the language and definitions to proceed further”. I do not see why personal borrowing from a bank is misleading terminology. In the same way, I don’t see any issue with the phrase “labour market”.

      Reply
  10. NeilW

    Accounts are always a point of view based upon policies in a reporting currency. Which means as a matter of construction they *convert* assets denominated in other currencies at the rate on the day into the reporting currency.

    Which has the effect of causing conversion of denominations, which is impossible in a floating rate regime.

    That distorts the view point where many if not most entities in a particular political control area actual interact with numerous currency areas asynchronously and independently.

    The accountant line applies to the national accounts as much as it does to the individual entity accounts.

    “Cash is a matter of fact. Accounts are a matter of opinion”.

    Opinions differ.

    Reply
  11. gus

    “That’s what makes it so hard to explain to people – there is no appropriate term in the vernacular by which to describe it.”

    Best I have come up with is that in regard to ‘lending’, commercial banks are in the business of ‘upgrading’ their customers’ IOUs, for a price. Basically in the ‘borrowing’ process, the customer and the bank swap IOUs.

    Why would anyone pay to swap IOUs? Of course because their own IOU isn’t widely trusted/accepted as valuable/redeemable, while the bank’s is (based on reputation, government regulation/insurance, physical/web infrastructure, etc). And the bank can be in this business because they are focusing on evaluating the value/creditworthiness of individual people/firms (underwriting / credit scoring).

    Reply
    1. axdouglas Post author

      I like that! Also, the bank’s IOU is automatically inside the payments system, whereas yours is not.

      The bank can also be in that business because of its sheer scale and its protection by the State / access to lender of last resort. That’s where much of the trouble comes…

      Reply

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