Perhaps it increases efficiency by reducing the number of syllables necessary to convey a message, or provides valuable information during negotiations thereby letting each party evaluate the credibility of the others.  One could come up with many rational, and a few cynical, hypotheses founded in economic theory to explain why every discipline, industry, and profession does it - that is - develop an insular, obtuse lexicon.  I can certainly offer many examples of the phenomenon; lawyers speak in generally unintelligible legalese and acronymfinder.com has definitions for over 3 million acronyms, abbreviations, and initialisms (although interestingly enough, the ‘word in meaning’ function of their website returns nothing when you use it to search for initialism).  A few weeks ago the Wall Street Journal published an article titled Corporate Jargon Comes Home, which details how pointless and confusing the pattern is, concluding with, “[s]ometimes we don’t even know what we’re talking about.” As economists, we can try to explain why this happens, but we can’t claim to be immune to the problem. 

Economic jargon is formed predominately of phrases that attempt to capitalize on the credibility of physics (consider “velocity of money”) and while this may help give credibility to the relatively soft science, it is not necessarily the most efficient way to build understanding.  Think about it… announcements from the FED are notoriously hard to decipher.  Now, for the deconstructivists out there, I can hear you thinking already – “To the extent that the speech of the FED is meant to convey a level of uncertainty about their predictions for the market, such speech may be an efficient way to allow investors and the chairmen to share the risk of incorrect predictions”.  Maybe… but that seems to be a question for another day. 

I’m more concerned with the erratic pattern of euphemization I see spread widely through our language. This has been brought out in a number of high profile cases in the last few months, notably the HP “pretexting” scandal.  Most commentators I’ve heard seem to believe that the problem is universal, that everything is now euphemized; they implicitly argue that this was not so in the past.  I disagree.  The problem is not that everything is now watered down, if that was the case audiences would quickly realize that issues were not being presented honestly and adjust their interpretations accordingly. The problem is the unpredictable application of strong language.  Many things that do not really matter are spoken about as if they are exceedingly important (think Mad Money), and this is just as harmful to broad understanding as euphemization.

The problem is that many readers and listeners don’t understand what is really being said unless the meaning is pointed out by someone with the proper knowledge and an influential position.  We may begin to gloss over the true meaning words and what should be shocking statements seem to become innocuous side notes in many of our minds.  Again, economics is not immune.

To put it another way, at least at the undergraduate level, we don’t often delve deeply into the real-world ramifications economic theory; we know just enough to explain-away the things we don’t want to hear.  I found myself doing this while reading for Law & Economics last semester. 

The piece I was reading explained that in cases of nuisance externalities, a producer’s goal is to find a low-cost victim.  OK, I thought, in this case “victim” may be defined as the party that will be harmed, the word need not have the ugly connotation it often does.  These producers are making a product that benefits society but the production process also generates a negative externality such as noise or smoke, they aren’t really victimizing anyone though.  Low-cost victim just means we want the producers to choose a location and method of production that minimizes harm - that makes sense. 

But that’s not necessarily what finding a low-cost victim means, is it?

A profit maximizing firm, which we assume all rational firms to be, is concerned with one thing – maximizing profits.  This means their goal is not to minimize the amount of harm associated with their production process, but rather, to minimize the compensation they must pay because of the harm they inflict.  This is an important distinction.  Once we accept that this is the real objective of firms, we are able to see that they have an incentive to take advantage of the problems commonly associated with public bads.  They have an incentive to look for locations where transaction costs are high, where coordination failure is likely, where the population feels disenfranchised, where people do not understand their rights… or perhaps most cynically – where the law undervalues the resources to be exploited or the people that stand to be victimized. 

I began to wonder, in the real world, who are these so-called low-cost victims?  It turns out there are some really interesting answers that may or may not conform to your sense of justice – and perhaps more importantly, may prompt you to question how often basic economic assumptions hold true.  Without regard to how you answered the previous question, it is also worth asking, what are the policy implications of all this?

Majora Carter gave a thought provoking talk at this year’s TED conference that offers one perspective on the issue.

(We’ll be watching and discussing this video at our Jan. 23^rd meeting – hope to see you there!)