Could Humpty Dumpty have been an economist?

Noah Smith in another superb column points to how most popular terms/words used in economics are vague and poorly defined. He starts with Humpty Dumpty:

In Lewis Carroll’s “Through the Looking Glass,” Humpty Dumpty proudly declares: “When I use a word, it means just what I choose it to mean– neither more nor less.”  To which Alice replies: “The question is whether you can make words mean so many different things.”Humpty Dumpty could have been an economist. The modern economics profession made a collective decision, long ago, to develop a system of jargon in which words have multiple, sometimes contradictory meanings. Unfortunately, the general public’s reaction tends to be similar to that of poor Alice.

Want some examples? There’s no shortage. Let’s take the word “investment.” Most people think this means buying some financial assets, such as stocks or bonds. That’s basically a form of lending — you give someone money today, and you hope they’ll give you back more money tomorrow. Economists call that “financial investment,” but the kind of investment they usually talk about is business investment, meaning a company’s purchase of capital goods. Since companies use debt to buy capital goods (or use their own cash, which is essentially the same thing), this kind of “investment” is actually a type of borrowing.

So economists use the same word to mean both borrowing and lending! That couldn’t possibly result in any confusion, right? Two similar examples are “capital” and “equity.” “Equity” can mean stock — partial ownership of a company — or it can refer to “shareholders’ equity,” which is a measure of the value of a business.

“Capital” in econ can mean financial capital, i.e. money in the bank. More commonly, it refers to capital goods — productive stuff such as buildings or machines that help you create more stuff. Though economists usually use the term in the second way, many people outside the profession refer to financial capital as “economic capital.”

Confused yet? We’re just getting started.

🙂

He adds equilibrium, rationality, efficient as well to the list whose meanings differ from economist to economist. Then this tale:

As a result, academic economists tend to talk right past each other at times. I’ve listened to two economists argue for 15 minutes about whether people are “rational,” only to have it turn out that they were using two different definitions, and were actually in agreement.

But a far worse consequence is the divide that this sloppy jargon creates between economists and the general public. Alice might have been polite to Humpty Dumpty, but Americans tend to react to economists in ways that are more … flamboyant and colorful. They berate economists for thinking that markets reach an equilibrium, not realizing that economists call anything an “equilibrium.”

Is this the fault of the general public for misunderstanding? I think it’s economists’ fault for not explaining. Economics is a social science, and it practitioners tend to live in their little silos, proudly ignoring the outside world. But beyond those silos, real policy decisions are getting made that will affect the lives of millions of agents … er, human beings.

As jargon creates a greater and greater disconnect between what economists really believe and what the public thinks they believe, the chances grow that the discipline will suffer a Humpty-Dumpty-like fall in prestige and influence.

 Amen to that fall. The sooner it happens the better it is for the discipline and its followers..

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