
How Five Economists Think About Bitcoin - semilshah
http://techcrunch.com/2013/04/14/iterations-how-five-real-economists-think-about-bitcoins-future/
======
spodek
Say it's a bubble. People still buy tulips, internet stocks, and houses. Their
bubbles didn't kill those markets. As long as a few people value what bitcoins
offer, a market will exist for them. _You_ may not value them, but no market
needs _your personal_ involvement.

As for economists' views on something they've never studied, I'm reminded of
I. Fisher, Prof. of Economics at Yale, saying in 1929 " _Stocks have reached
what look to be a permanently high plateau._ " ... and how many people told me
with utter certainty and hifalutin credentials how stupid Wikipedia was and
how much it would fail. Or Linux, for that matter.

Some things work better in practice, not in theory. Or at least need time for
the theory to catch up.

~~~
necubi
Bitcoins are just special numbers--there's no inherent value in them. If
everybody decides tomorrow to use a different blockchain they will become
completely worthless numbers.

A tulip looks pretty in your garden, (many) internet companies make money, and
houses are a basic necessity. Bitcoin, on the other hand, is a purely social
phenomenon. It has value only because other people think it has value.

The argument trotted out at this point is some variation of "but there is
value in having an anonymous, decentralized currency." And that may well be
true. But the high valuation and extreme volatility of bitcoin (not to mention
its inherent deflationary character) is actually a hindrance to its use in
that manner. Who will accept bitcoin if its value can fluctuate 100% in an
hour, and who will spend them if their price just keeps going up?

~~~
ef4
Your argument applies equally well to any form of money. Money is a purely
social phenomenon. It has value only because other people think it has value.

There's no "inherent" value in any form of money. Whenever you hear someone
say "inherent" or "intrinsic" when talking about money, run the other way.

(Yes, even commodity money. It may have direct-use value in addition to
exchange value, but both kinds of value are market phenomena, and totally
dependent on the surrounding society and capital structure.)

~~~
betterunix
Fiat currencies have value because of the law, not some wishy-washy magic
agreement that people wake up with. Tax laws, debt laws, torts, fees, fines,
etc. are what create the demand for fiat currencies.

Bitcoin does not have such a source of demand. It has no particular utility at
all; nobody will ever suffer for lack of Bitcoin money.

~~~
smokeyj
> Fiat currencies have value because of the law

The law is simply the threat of violence, which is what makes it so
distasteful. <http://en.wikipedia.org/wiki/Executive_Order_6102>

> not some wishy-washy magic agreement that people wake up with

Agreements are voluntary and magical, what's not to like? It's the other stuff
that's wishy-washy (involuntary arrangements).

> Tax laws, debt laws, torts, fees, fines, etc. are what create the demand for
> fiat currencies.

There's no reasons these same things won't work for bitcoin. Private mediation
and arbitration already exist that support bitcoin. Things like contracts are
built into the bitcoin protocol and will facilitate many of the things you
list.

> Bitcoin does not have such a source of demand. It has no particular utility
> at all; nobody will ever suffer for lack of Bitcoin money.

Pretend the bitcoin market is only used for black market activity, it would
still have a large utility. Plenty of people on the market would see one less
revenue stream.

------
ArchD
As one of the comments point out, at least one of these 'professors' is wrong
about anonymity. Don't let the title fool you into crediting more authority
than warranted. I shouldn't have read this article.

~~~
dllthomas
Bitcoin does not have anonymity; it has pseudonymity with a public transaction
record. Depending on your needs and what other precautions you take, that may
be good enough, but it's not the same as handing someone a pile of small,
unmarked bills.

~~~
pygy_
Freshly minted coins are as anonymous as the public IP that claimed them. If
you mine behind TOR (even if you're part of a pool), your new coins are
anonymous.

The same goes for the transaction fees.

~~~
dllthomas
Is anonymity in the minting of coins the piece of this anyone cares about?

~~~
pygy_
My point is that it is possible to get and spend bitcoins anonymously, by
trading electricity for coins.

This:

 _> Bitcoin does not have anonymity; ..._

is thus not true.

If you purchase your coins through an exchange, it becomes traceable, off
course.

~~~
shardling
But since the end game of bitcoin is that basically no new coins will be
mined, how does that matter?

~~~
dllthomas
You can still get coins to a fresh account through transaction fees.

------
pjscott
An entertaining thing about articles of the form "How n Economists Think About
x" is just how _confident_ most of them manage to sound when making statements
that some of the others disagree with.

~~~
baddox
Economics, like politics, is heavily based on axioms over which reasonable
people disagree. The problem is that people value their axioms so intensely
that they take them for granted and don't even share what those axioms are,
let alone discuss them with people who hold opposing axioms.

~~~
shardling
I've heard that within the discipline, this isn't really the case -- most
academics understand there are a lot of issues very far from being settled.

It's the outward facing economists, the ones who you actually hear from, that
project a kind of false confidence in their models.

------
baddox
Right off the bat:

> _It would really be something if intelligent people chose to invest more
> trust in a currency system built and managed, in large part, by anonymous
> computer hackers than they did in currency systems built and managed by
> governments of the people, by the people._

Chris Robert doesn't seem to understand the mathematics behind bitcoin. The
whole point is that the bitcoin network _doesn't_ require any trust, or
rather, it only requires trust that the longest block chain is mostly honest
and that the current understanding of cryptography and computational
complexity theory is correct.

Then we have Robert McMillan:

> _Unfortunately, as those familiar with Paul Krugman’s writings on liquidity
> traps know, Bitcoin’s known and finite supply dooms it as a workable
> replacement currency._

This is a common straw man argument. Which bitcoin enthusiasts have claimed
that bitcoin needs to be a "workable replacement currency"?

> _Furthermore, as it has no apparent use-value (unlike, say, Platinum), this
> kills it entirely._

Technically, since a bitcoin is a proof that a certain amount of difficult
computational work has been performed by or on behalf of the current owner of
the bitcoin, there is some use-value. Bitcoin can be thought of as a networked
version of Hashcash that allows the work to be performed in advance. Mail
servers could be configured to require that a tiny amount of bitcoin be
attached to every message it receives, hopefully making most spam
unprofitable. This is probably merely an oversight by Mr. McMillan, but does
this really even matter? What is the apparent use-value of a government-issued
currency like the USD?

Matthew Bishop poses an interesting question:

> _But what if a sovereign state was to issue an algorithm-based currency?
> Would that drive fiat money out of business?_

I wonder if it would also drive non-governmental crypto-currencies out of
business.

I find the following quote from Brett Gordon humorous. Economists don't seem
to agree over whether bitcoin's deflationary nature is a benefit or a
drawback. It's almost as if different people value different things.

> _Two benefits are that bitcoins are inherently deflationary and transactions
> are anonymous. Given the recent slew of fiscal crises and increasing
> concerns about online privacy, these are two strong points in bitcoin’s
> favor—or whatever future crypto-currency arises._

~~~
sirclueless
> _Two benefits are that bitcoins are inherently deflationary and transactions
> are anonymous. Given the recent slew of fiscal crises and increasing
> concerns about online privacy, these are two strong points in bitcoin’s
> favor—or whatever future crypto-currency arises._

This was the funniest thing to read for me. It flies in the face of two of the
biggest complaints I see about Bitcoin (the third being the "it has no
inherent value, not even status as legal tender").

You mention that Brett Gordon is disagreeing with many people when he claims
that being deflationary is a benefit. Even in this same article you see the
exact opposite being said:

> _Unfortunately, as those familiar with Paul Krugman’s writings on liquidity
> traps know, Bitcoin’s known and finite supply dooms it as a workable
> replacement currency._

So there's two completely contradictory positions on that issue. But also on
the anonymous transaction issue. Every bitcoin transaction is quite obviously
public, so that right adjacent to this quote is Chris Robert's:

> _The bubble can just grow and grow, so long as... the fundamental lack of
> anonymity doesn’t bother anyone._

So in the same article we have economists saying built-in deflation and
anonymity are benefits of Bitcoins, while others say deflation will kill any
chance of viability as a currency and that Bitcoin has no anonymity. What's a
person to think, besides that many economists don't really understand Bitcoin
and are probably just as speculative as the people buying Bitcoin at $250
several days ago.

------
tunesmith
I didn't see much new there... perhaps except for the talk on currency 3.0
that fixes bitcoin's deflationary problem. I wonder if we'll see some new
digital currency that has something of a decentralized algorithmic fed that
can increase/decrease a monetary supply based off of certain rules.

~~~
dllthomas
Divisibility fixes an important piece of the problem of a fixed maximum number
of bitcoins. It doesn't address the deflationary-spiral piece (holding
bitcoins means fewer in circulation, means you're paid more to hold bitcoins,
means there's fewer in circulation...). Freicoin adds demurrage to attempt to
deal with that piece; I'm curious as to how effective that is, but it seems
plausible that between the two there's then no real issue.

------
defen
Is anyone else bored by the Bitcoin debate yet? As far as I'm concerned it's
the ultimate "put your money where your mouth is" situation. If you think
Bitcoin is a foolhardy endeavour doomed to failure, just don't buy any. Short
it when that becomes possible, for all I care. Problem solved, and you are not
harmed in any way when it inevitably collapses. If you think it's the greatest
idea since fiat currency, buy some and gloat when one BTC is worth $900,000 in
20 years. But what is the point of these endless articles debating it?

------
kriro
I think essentially the Austrian explanation of money is a good one.

Simplified version... Ask yourself this question: Why is money valuable.
Answer: because I can buy stuff with it. Why can I buy stuff with money?
Because it's valuable doh. This is circular of course, von Mises solved this
by turning it into an infinite regress i.e. money is valuable because it was
valuable before and moving the chain of reasoning backwards and arriving at
the fact that money must have been valuable as a commodity before it became a
money. There are certain characteristics that make one commodity more likely
than another to become a money and to make a long story short that's why
Austrians tend to favour the gold standard (because gold used to be a
commodity then turned into a money). This would suggest bitcoins (and dollars,
Euros and so forth) are bubbles. In the case of bitcoins one could even argue
that if you could redeem them for the computational input you used when mining
there is some commodity behind it.

With that and the disclaimer that Austrians are fringe at best and laughed at
by many mainstream economists out of the way let's get to my opinion on
bitcoins and fiat money.

I think that fiat money which is just backed by the word of the government
that it's solid somehow works. Why and how I cannot explain nor do I seek to.
But essentially I think that's why bitcoins could very well work, too. The
backing is not by any government but rather by "internet consensus of sorts".
In the information age that could essentially become a more powerful word of
mouth backing (if enough people believe it it'll be stable) than the backing
of any government.

I don't think this is the final iteration of this sort of currency but if we
must have a fiat currency by all means please let it be one that allows for
the privacy bitcoin has inherently built in. Ultimately though the currency
that you have to pay your taxes in is the one that has the edge.

At the very least it shows that people are interested in a currency that is
easy to use electronically, anonymous etc.

~~~
philwelch
> I think that fiat money which is just backed by the word of the government
> that it's solid somehow works. Why and how I cannot explain nor do I seek
> to.

Because of fiat, of course.

To be precise, US Dollars are valuable because the US Government only accepts
tax in US Dollars. Since taxes are levied on a proportion of economic activity
_by definition_ , that percentage of economic activity is instantly converted
into demand for US Dollars. Additionally, thanks to legal tender laws, it's
obligatory in the United States to accept US Dollars as payment for a debt.
Thus, there is a large quantity of legally generated demand for US Dollars--
enough to keep the currency valuable enough for other economic activities.

It is also no mistake or coincidence, for instance, that wages and salaries
are paid in US Dollars. When you combine laws saying both "income taxes must
be paid in US Dollars" and "income taxes must constitute a proportion of total
earned income", it saves a lot of effort for the earned income to be
denominated and paid in US Dollars. If you got paid in bitcoins, someone would
have to calculate the value of bitcoins in USD, sell some bitcoins for USD,
and pay the taxes in USD. Actually, this is exactly what happens with stock
grants (in a publicly traded company).

Unless you can somehow generate similar amounts of demand for bitcoin, and
simultaneously tightly couple that demand with major streams of economic
activity, you won't accomplish the same thing. As far as I can determine, only
the government can unilaterally dictate the currency that large, double-digit
percentages of the GDP need to be denominated in.

------
jostmey
As an idea, bitcoin is perhaps one of the most revolutionary ideas in our
lifetime. As a practical, functional currency bitcoin may fall short. It is
clear that the first two economists quoted in the article simply fail to grasp
the gravity of the concept of a purely digital currency. It is without
borders. It is beyond the reach of government. It is the future.

~~~
illuminate
Or perhaps the economists are far more familiar with BTC's precursors in
spirit and practice than you are. Very few concepts are truly original. That
you can't imagine them does not mean that the economists are wrong.

(Granted, they could be still, but arguing from a lack of imagination is far
less convincing.)

~~~
jostmey
An idea does not have to be novel or radically different from everything
before it to be revolutionary. Perhaps the best ideas simply build on the old
ones.

~~~
illuminate
Which is true (and why I think BTC's children will fare much better) but
"revolutionary" doesn't mean unfathomable, unquestionable, and alien from all
that's come before.

------
venomsnake
Isn't it possible to build a bitcoin(protocol) system with predictable
inflation in the single digit percents, maybe with few negative feedback loops
to keep it there.

This way the currency will be great for transactions, but ultimately
unsuitable for long time value storage. It should be only slight modification
and will remove a lot of the practical problems.

~~~
dllthomas
Look into freicoin.

------
hayksaakian
The notion that the US dollar is intrinsicly valuable due to it's ability to
pay taxes is flawed at best. In several foreign countries, the primary means
of exchange is USD, yet taxes are still paid in the local currency.

Multiple currencies will coexist, and if bit coin somehow overtakes USD, that
won't say anything about what you pay taxes with.

~~~
gwern
> In several foreign countries, the primary means of exchange is USD, yet
> taxes are still paid in the local currency.

I feel so sorry for those countries' governments - imagine being paid in
currency which is completely worthless because it has no intrinsic value, not
even that set by taxation! One wonders why they bother collecting taxes if the
proceeds cannot buy so much as a coffee; wouldn't it save everyone a lot of
time and hassle if they just dropped the pretense of taxation entirely?

------
jfoutz
pretty sure, If you think it's a bubble, it's not a bubble. It might be
overvalued, but that's very different from everyone screaming BUY BUY BUY

