Wednesday, March 15, 2006

Chain saws, Democracies and Savings

"When I use a word," Humpty Dumpty said in rather a scornful tone. "It means just what I choose it to mean - neither more or less."
"The question is," said Alice, "whether you can make words mean so many different things."
"The question is," said Humpty Dumpty, "which is to be master - that's all."
Lewis Carroll

Imagine being in the viewing area of a medical school's surgical theater while a surgeon was demonstrating a "face lift." After carefully drawing lines to act as incision guides on the face the surgeon turns to his nurse and asks for a scalpel. The nurse bends over, lifts a chain saw from the floor, pulls on the starter cord a few times until it's running and then hands the idling chain saw to the surgeon.

The surgeon, now shouting over the roar of the chain saw, calmly looks up at the audience, guns the chain saw engine a few times and says, "I will now make the first, delicate incision over the eye in one smooth motion to ensure that scarring is kept to a minimum." Revving the engine to full speed, the surgeon holds the saw inches from the face and says, "like so."

Absurd, right?
Chains saws effect the world in one way, scalpels in another. Chain saws are not scalpels. Calling a chain saw a scalpel does not make it one. It only makes the person abusing language seem a fool, and in our example above, will likely leave more of a scar than hoped for.

Ahhh, the perils of the misuse of language.

Consider the term, democracy, which, via its Greek roots, means rule by the people, as opposed to aristocracy, rule by a privileged class. Democracy is clearly different from aristocracy and will have different effects. Those who expect the effects of democracy to flow from an aristocratic government and vice versa will be as disappointed as those who expect the effects of a scalpel when using a chain saw.

Democracy, it has often been said, is a revolutionary response. It is not imposed, for the imposition itself is not democratic. In one sense it is a bubbling over of the people in a society with a general aim of having all people in the society be equal under the law, along the lines of Rawls, A Theory of Justice.

One demonstrates faith in democracy by, among other behaviors, living within the same rules that all members of society live within, not by thinking one has one set of rules for the rulers and one set for the ruled. "Democracies" informed by the latter sensibility of two sets of rules, such as might exist in a colony are likely to eventually suffer a rather ironic, democratic, revolution.

Democracy though isn't the only word whose meaning seems to have drifted in the minds of some users. Savings is another.

The word savings refers to things that one has saved or made secure, insulated from external perils, from the Latin salvus and salvare. If one was a farmer, one might save grain, which would mean to put it aside in a place it would not rot and could not be taken. In real world economic thinking savings are always of this form, goods set aside for later use.

The use of the term savings to refer to money hoarded up is from the early 18th century. Back then, barring a few notable exceptions, money was specie, gold or silver, and quite tangible. Admittedly, gold and silver were not grain in a silo or meat in a ice box, but rare was the time one could not trade the former for the latter.

Decades and even centuries ago, when economists wrote of the effects of savings, they were referring to real things put aside for later use. I don't think Mr. Bernanke refers to the same things when he writes of a global savings glut.

Like the word, democracy, the word savings has come to mean different things through time, which might be why unexpected effects flow from old models which use them as variables. To wit, it sure seems strange to me to have prices rising when there is a global savings glut.

Even though money is, by law, or fiat, no longer a claim on any real world good, savings has come to mean money, not just hoarded, but in a bank, as in a savings and loan. Yet, by law, money has no claim on real savings, it is merely a means to settle debts.

Last year an auctioneer friend of mine was checking out the contents of a house for a possible auction and was shown a set of golf clubs. The owner was lauding the clubs, hoping they would fetch a nice price and my friend told her, probably without cracking a smile, "what you have here, Ma'am, is a used set of left handed golf clubs."

Fed Chairman Ben Bernanke might like to imagine the world is sitting on a "global savings glut" but the words of my auctioneer friend come to mind. What you have here, Ben, when you examine the balance sheets of the worlds Central Banks, is a huge pile of used debt. It is debt of a country which can, at will, devalue the currency in which the debt is to be repaid. You and your Central Banker buddies are likely to find it easier to turn lead into gold than to transform that huge pile of used debt into goods and services.

Ah the perils of the misuse of language.