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What lies beneath the finance industry's water words

10 Comments
David James |  04 June 2017

 

One thing that is rarely done is a literary-style analysis of the language used in finance and business. It can quickly reveal the sleight-of-hand, even outright deception, that plague these powerful sectors.

Paper boatTo take one example, finance language heavily relies on water metaphors, which are deeply misleading. It is unlikely that this is done deliberately; it is more probably reification (making the intangible appear to be concrete). But its consequences have been, and remain, devastating.

The water metaphors have many variants. Participants talk routinely of capital 'flows', which is the rate of transactions, or financial 'liquidity', the willingness of investors to participate in markets. Economists speculate about equilibrium — indeed one popular economic theory is General Equilibrium Theory, the notion that markets should be allowed to find their 'level', in much the same fashion that water does.

Money can be 'channelled' into investment, or sources of capital can 'dry up'. There are colloquial phrases like the 'trickle down effect' (wealth at the top will make its way to the lower levels) and 'a rising tide raises all boats' (when the economy is doing well, everyone benefits).

By creating the linguistic illusion that money is a fluid, the impression is created that resources and capital are flexible and can be moved around easily as long as barriers are removed.

The barriers to that fluid are, of course, governments, which are depicted as something like physical obstacles. Hence claims about the need to 'deregulate' the financial system in order to create greater efficiencies and encourage capital to find its appropriate level. A picture resembling a system of locks and weirs is conjured up.

It is hard to think of a more contradictory notion. For one thing, governments necessarily set the fundamental rules of money, from the fine details that determine whether paper money is legitimate, to the level of bank capital reserves or the legal strictures that apply to creditors and borrowers.

Governments cannot get out of the way; they are central to determining how transactions occur. It is why in the global financial crisis all eyes turned to government when the financial system almost collapsed. In the end, even the most libertarian of traders knew that it was governments that set the rules.

 

"Looking closely at word use can prove extremely revealing. In the case of finance language, what we see mostly is deceptiveness."

 

That unavoidable fact was concealed, however, by the use of language. By creating the metaphor of money as a fluid that must be allowed to move freely the emphasis shifted. Governments did reduce their regulation and oversight of the markets, leaving the traders to make up their own rules, resulting in the establishment of a global market that superseded national governments. It included massive increases in the size of the derivatives market, which are mostly bets about the future value of financial assets such as exchange rates, interest rates or equities. Unlike fiat money, which is supervised by governments, they are governed informally. It might be better described as 'meta-money': a way of making money out of money that is potentially an infinite regress.

There are many different barbarians of language, in some ways they belong to different tribes, each with its own idiosyncrasies. The finance sector is only one. Managers, bureaucrats, scientific positivists, and some areas of academia are also plagued by such a limited or deceptive use of language. What they have in common is a lack of awareness, or a willingness to ignore, what their words are doing. It is a primitive view that sees language solely as dead signs whose only function is to point to a meaning.

From the literary point of view, language is not dead; it is alive. Looking closely at word use can prove extremely revealing. In the case of finance language, what we see mostly is deceptiveness. Exposing the tricks can help us get a healthier understanding of the true role of the world of money.

 


David JamesDavid James is the managing editor of businessadvantagepng.com.

 



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Love the analogy. Now I understand why investors are left to sink or swim!

john frawley 05 June 2017

Thank you David. This is an interesting article - with implications for other areas of society. Words are powerful and how the powerful use them affects not just the everyday lives of ordinary people but ultimately the state and future if the world in which all we ordinary people live. I am also interested in the intention behind such language. The intention is not disinterested. (I note my irrepressible hermeneutic of suspicion...) Is the intention love? Is it peace? Is it hope? Is it a more just, compassionate and humane society? Or is it, more bluntly, self interest and the bottom line? Your article is illuminating and enlightening.

Fiona Winn 06 June 2017

It's good to read an article written by David, in which he makes explicit use of his doctorate in English literature. I have long been impressed how his own use of language has enabled commercial illiterates like me understand the fine details of the subterfuge and chicanery that so often passes for comment on financial and other commercial matters. Imagine such a literary-style analysis of the language of Australian politics, but only if you have a strong stomach.

Ian Fraser 06 June 2017

Hi David , Ever since I did economics at school and later 1st year Uni. I have always been amused by economic jargon. A very dry subject so I didn't go into 2nd year Uni as a result! Your comments are absolutely spot on!

Gavin 06 June 2017

The economy as I see it. The economy is based on money. If money loses value, the economy is going badly. If it gains value it is doing well. If the cost of goods is increasing, the value of money is decreasing and so the economy is doing badly. So how many centuries have passed since the economy of any country, anywhere, could have been said to be doing well? How long has it been since any economy has been healthy?

Gavan 06 June 2017

Very illuminating thanks

Pamela Jones 06 June 2017

Whilst in agreement with David's main message pointing out how commonly used technical language can (and does) tend to disguise reality (especially in finance), I wish to point out that in the term "general equilibrium" [GE] as used in applied economics, the "general" is literally accurate but the "equilibrium" is not. In fact, all that equilibrium denotes is that the interactions between all parts of the economy are taken into account. Thus in the widespread international use of the GTAP computational framework, all kinds of disequilibria due to market power of particular groups, or to particular government policies, or to a changing technical environment (such as climate change) can be explicit parts of the models used. They may still be called "general equilibrium" but they do not have to support the notion that governments should keep out of markets. They can help governments to understand the detailed impacts of potential policy changes. That is why governments look to their policy agencies to use applied GE modelling.

alan powell 06 June 2017

The economy is not based on money, it is the commodities that are produced that provide shelter, food and the other necessities that society needs. They are measured by the Gross Domestic Product (GDP. Money helps the products to flow between them. So water is a good analogy.

Reg Wilding 06 June 2017

The water analogy comes from the special purpose analog computer used to simulate the economy, built in the early 50's by a New Zealander. At the time, economists had a limited understanding of how everything interacted and the model opened their eyes. It is not surprising that the water analogy persisted as it was visual and filled a great gap. This is from memory as I have no time right now. I'll read the article properly and follow up later.

Peter Horan 07 June 2017

First of all, I commend the point of the article that language is used by many to corrupt how the community thinks about economics. Nevertheless, when we model, we do talk about flows even though the material is not a fluid. It is useful to model, but it must be done in order first to learn, secondly, to analyse behaviour, and (only then) thirdly, to predict. Attempting to reason about the economy without involving the whole model is wrong. ADDING TO my previous post: The New Zealander was Bill Phillips (1914-1975), engineer turned economist. He designed and developed the amazing - for its day - hydro-mechanical economic computer in 1949 at the London School of Economics to demonstrate in a visual way the circular flow of money within the economy. Approximately fourteen machines were built. The only working MONIAC [Monetary National Income Analogue Computer] in the Southern Hemisphere is located in the Reserve Bank Museum & Education Centre, Wellington, New Zealand. Economists who worked with that computer would properly understand the economy, and would not be misled by the terminology. Until that time, economists were arguing how to manage the economy and getting it wrong. Many still get it wrong, but it is because they still do not understand the economic system. It is very easy to use the water analogy to make simple predictions, and many people, who think they know better, do so, but the point of MONIAC was to show that the economy was not simple and not subject to such simplistic thinking.

Peter Horan 07 June 2017

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