When I first worked in mental health back in the late 1970s, a young copper came into our emergency clinic one morning. He was handcuffed to a woman who looked very upset and disturbed. "Can I use your phone, love?" he asked. The phone was handed over and he informed the person at the other end in a very loud voice, "I'm just down the Maudsley while they try to work out if this one I've got's a nutter or not."

PCs are more "PC" today than they were 30 years ago. The liberal consensus is that the careless and flippant use of words such as "fruitcake" and "wacko" reveals a disrespectful ignorance towards people with mental health problems. The Guardian's own in-house style guide counsels against using such "clearly offensive and unacceptable expressions as loony, maniac, nutter, psycho and schizo". But if you want to talk about mental incapacity in English you will not find yourself lost for words. This is one of the richest areas of our language, and we seem to revel in the joyful creativity of coining words that skip around, compartmentalise and poke fun at the serious issue of mental illness.

Take the word "barmy", for instance. This is literally a frothy word: "barm" refers to the foamy head of a pint of beer. But try accurately to discuss the issue in a fair and unbiased way and you end up tying yourself in knots. Even those who have been given nice, polite medical diagnoses for their conditions sometimes prefer the "offensive and unacceptable" slang.

I recently returned to my old workplace, the Bethlem Royal Hospital, to investigate this issue for the new series of Balderdash & Piffle. As "Bedlam", the hospital's very name has now become a byword for uncontrolled madness.

Back in the 18th century visitors paid a penny to gawp at the inmates at Bethlem every first Tuesday of the month, and they might have expected some screaming and chaos for their money. No doubt there were plenty of disparaging terms levelled at the unfortunate residents, perhaps including "lunatic" (used to describe a type of insanity governed by the phases of the moon, and first cited by the Oxford English Dictionary as being used in 1290) or "mad" (which actually should be "amad", but we carelessly lost the "a" some time around 1300). But the age of casual voyeuristic entertainment was to be replaced in the 19th century with the age of obsessive classification. Along came science to clean up the maelstrom of madness by colonising, treating and naming every dark recess of the human mind. "Hooray!" the unfortunate inmates must have thought. "We will no longer be subjects of derision but participants in the onward march of science!"

Now we have a whole new set of medical words to describe mental illness. For the moment, they sound very serious and diagnostic. But the brain is a sensitive tool about which we still know very little; it is discussed and treated in broad brush strokes. Does "schizophrenic" or even "bipolar" really describe anyone more accurately or specifically than "bonkers"? Or does it just sound more respectful? Do most people understand what a "mental health service user is"? And how soon, in the hands of the cackling British, will these new labels become comic labels of abuse?

"Cretin" was once a serious medical term, applied in the 18th century to a group of people living in mountainous places including Switzerland. Due to a lack of iodine in the soil they developed a thyroid gland deficiency and developed a big lump, or goitre, on their throat, an enlarged head and very chalky white skin. Some say that the word "cretin" derives from the Latin "creta", meaning chalk (an allusion to their complexion). Or it could be from the French word Chrétien, meaning Christian, in a plea for these unfortunate individuals to be accepted as children of God.

But whatever its origins, it was not long before the term was used as an insult for those who had never suffered from hypothyroidism. By 1933, James Joyce was seething in a letter that "the cretin of a concierge has misdirected half my mail". This is the way language is: it is fluid and it changes rapidly, whether it be in the hands of literary authors or kids in the playground.

Rarely does anyone think to ask those with mental illness what terms they would choose to describe themselves. I did - over macaroons in a greenhouse in South London. My four guests were a diverse group of people. What they had in common, other than a fondness for outlandish headgear, is that they had all been diagnosed with mental health problems including schizophrenia and bipolar disorder. Far from shrinking away in their flats as you might expect, these individuals are all actively promoting madness, creativity and individuality through organisations such as Mad Pride and Bonkersfest, and language lies at the heart of the battle.

All of the mad hatters agreed that it was time to do away with medical labels. Their answer is to reclaim those terms that have been used against them as insults. Mad Pride founder Simon Barnett questioned why we now shy away from the term "mad": "I think everybody knows what 'mad' means, whereas they don't necessarily know what a 'mental health service user' is." Self-proclaimed "mad psychologist" Rufus May chipped in that he'd like to scrap the DSM (the manual that psychiatrists use to diagnose mental illnesses). "Diagnoses put people into restrictive boxes - 'mad' is much more flexible."

Sarah Tonin, one of the organisers of the annual Bonkersfest, is clearly not averse to a little wordplay, and asked me to address her and her border collie, Lady Gem Barking, as "Your barkingships". For her, "bonkers" is top of the list of words to reclaim: "The problem with medical terms is that they are terribly misunderstood. They promote a culture of fear, and try to fit your whole being into a label and a set of symptoms. 'Bonkers' is not insulting; it's broad and lighthearted. We chose it as a name because it is both sexual and funny and fits with the celebratory mood of the festival."

Perhaps it is time to lighten up and to embrace terms such as "one sandwich short of a picnic", "cuckoo" and "bananas". I'm not entirely convinced that we should dispense with diagnostic terms altogether, but you can't fail to be impressed by the energy and positivity these people have about reclaiming words that would once have been hurled at them as insults.

· Balderdash & Piffle is on BBC2 at 10pm this Friday, repeated on Monday at 11.20pm.