

Adam Smith Hates Bitcoin - atestu
http://krugman.blogs.nytimes.com/2013/04/12/adam-smith-hates-bitcoin/

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guylhem
Maybe, just maybe, it's not Adam Smith who hates bitcoin like this misleading
title suggest, but Krugman.

The guy may have a nobel prize, but his strong leftist views seems to be
clouding his judgement.

Never before in history was there anthing like bitcoin. It's not a commodity
like gold - is is pure fiat money, fully based on trust. Hoarding gold or
silver or any metal or rare thing was a bad idea because of the alternative
uses which where then prevented.

There is nothing inherent to bitcoin that may hamper a "country to convert a
great part of this dead stock into active and productive stock".

In fact, by reducing friction, making transaction costs almost negligible, it
will help this very thing!

How could Adam Smith may have hated something that did not exist back then,
and that many economists had previously advocated for - a single worldwide
fiat currency.

The only real problem is for governments, who won't be able to use the
seignorage tax anymore, ie inflation, ie printing money out of thin air at the
detriment of currency owners, to coerce people to do things or lose money.

Bitcoin is a game changer, the end of a tyranny - the use of force to make
people work, instead of being able to live with what they have without the
fear that the government will decide to reduce the purchasing power of what
one owns by 20% overnight, through inflation or plain just stealing (as in
Cyprus) to "transfer that wealth", reverse Robin Hood style, to their well
connected and too big to fall fat-cat friends.

Also, it's quite fun that a system based on trust, of the people, by the
people, is not trusting the government. It's something the founding fathers
would certainly be quite proud of :-)

EDIT: And to those who argue the amount of computing power and electricity to
run the bitcoin network is insane, just think for a second about Moore law, or
how much GDP goes to the finance sectors. IIRC it is around 10%. That sure is
a whole lot of money for the simple job of allocating resources (currency,
saving, investment, transaction, etc).

It seems ripe for disruption.

A bitcoin economy will be able to do the same job for a fraction of these
cost, thus allowing capital to be best spent on other uses (say actually
advancing technology, or building real stuff) ie human capital and physical
capital, which according to mainstream economic growth theory (from Solow to
Romer) is essential for economic growth - real economic growth.

If you have some data and some time to spend, draw a graph of the log of gdp
per capital and the percentage of the gdp spend on the finance sector. You'll
see a strange recent trend - less growth, and more gdp for the finance sector.
I'm not arguing a causation, but that's some food for throughts.

Just like Gandhi say - first they ignore you, then they fight you, then you
win. We are currently at step #2. I expect the heat against bitcoin to raise
in the next weeks. It's a big threat for the current establishment cash cow.
It's a blessing to anyone who can provide value.

~~~
pavanky
The only way bitcoins are being generated is by wasting computer cycles
solving problems that are of no use to anyone. Krugman's problem is not with
the concept of bitcoin, but the process of mining.

I may not be an economist, but the method used for mining seemed.. illogical
to me as well. If a bitcoin was released into the wild based on running real
world problems like folding@home or something else it would have much more
sense to _me_.

~~~
NewAccnt
But you're both completely missing the point that mining for coins will become
exponentially more efficient over time, with new mining techniques and
hardware.

~~~
wmf
When more energy-efficient mining equipment is created, people buy enough of
the equipment to use the same amount of power that they used to have. For
example, one might replace a 300 W GPU with a 300 W ASIC miner. The total
amount of mining is determined by the exchange rate; since the exchange rate
is expected to increase due to deflation, the amount of power spent on mining
is also expected to increase dramatically.

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jshen
I think his previous statements are also significant.

"[bitcoin] has fluctuated sharply, but overall it has soared. So buying into
[bitcoin] has, at least so far, been a good investment. But does that make the
experiment a success? Um, no. What we want from a monetary system isn’t to
make people holding money rich; we want it to facilitate transactions and make
the economy as a whole rich. And that’s not at all what is happening in
[bitcoin]."

~~~
think33
Your quote is relevant, but it's a shame he doesn't address the implied claim
that bitcoin doesn't "facilitate transactions". And while it is relatively
small in that use now, he really needs to make a compelling argument to why it
won't work that way in the future.

Further, it's worth pointing out that Krugman endorses a monetary system that
makes people poor, via inflating the money supply by printing funds to
underwrite policies that benefit, primarily, politicians.

A currency whose supply is fixed, or whose inflation rate is constant and
predictable (like bitcoin) is better for facilitating transactions.

When you have a variable (and often high these days- in the US money supply is
up over %50 in recent years) rate of inflation, it wrecks havoc with prices
and other signals causing malinvestment and worsening the economy.

Something that Krugman, to my knowledge, has never answered for.

\---

Since I am not allowed to reply to the person below me:

It's quite silly to to say that a limited supply of a currency is bad for it.
There is little incentive to hang onto bitcoins. A simple example will prove
this to you: The amount of computer you can get for a given amount of money
improves dramatically every three years. You could just hold onto your money
and buy a much better computer. Thus, relative to computers, the dollar is
deflationary.... yet people still buy computers.

This is the kind of argument Krugman gives because he wants to excuse the
inflation that has destroyed the dollar, and the economy.... but it is
nonsensical. People still buy computers.

~~~
pbreit
Uh, Krugman's whole point is that the capped supply is inherently deflationary
so the incentive is to hang on to bitcoins, ie, not the best attribute of a
currency.

~~~
bbbhn
When did the notion that a currency which loses value over time is ideal
become orthodoxy?

There are plenty of legitimate arguments that can be constructed against the
idea of an inherently inflationary currency too.

~~~
parasubvert
"Best to have a stable currency with low inflation" grew out of hundreds of
years of observations in the history of human production, prices, and mediums
of exchange, and what conditions have traditionally leads to periods of peace
and prosperity in a region, and what conditions have led to war, revolt,
famine, etc.

In short, empirically, wages and prices are sticky. We assume it has something
to do with humans being stubborn, but don't really know why. However, until
our imminent replacement by the kind robots, currencies must move if people
won't.

------
lucasrp
Krugman obviously don't know what he is talking about. The resources he is
talking about are used to process the transactions between bitcoin owners. The
mining is just a side effect.

How did a nobel prize winner made a so basic mistake on a topic that has been
covered before by him so many times?

Bet one Btc that he did that on purpose.

~~~
bradleyland
Can you explain this in more detail for those of us who don't fully understand
how bitcoins come in to existence, because it sounds like one of those things
that violate some laws of thermodynamics, like the "hydrogen generator" that
you strap to your car to increase fuel economy.

I ask because I know I've heard about people building huge computers with lots
of expensive video cards for the purpose of mining bitcoins. Why would so much
computing power be required to perform a simple task like processing
transactions? Isn't there additional work necessitated by the intentional
complexity of the mechanics of bitcoin mining?

I don't know very much about how bitcoins are mined, so I'm speaking from
ignorance here, but I'm hoping you can see why the layman observer would need
more of an explanation than "Because, of course!"

~~~
yk
Rather abstractly Bitcoin is a scheme to solve the Byzantine General
problem[1]. The problem is, how can we build a trusted history of accounting
without knowing which nodes in the network are trustworthy. And the way
Bitcoin does this is essentially by letting every miner vote with his CPU
power and the history backed by the most computing power wins. Therefore as
long as the majority of miners (weighted by their computing power) is honest,
you can trust the accounting.

As to the question how Bitcoins come into existence, the miners are in control
of the accounting and by design whoever "finds a new block," is allowed to
create some Bitcoins (currently 25) out of thin air. The advantage of this is,
that even if some very large miner is considering that he could try a 50+1 %
attack, he has a strong incentive to stay honest because that way he earns
half of the newly mined Bitcoins.

[1] <https://en.wikipedia.org/wiki/Byzantine_fault_tolerance>

~~~
dragonwriter
> Therefore as long as the majority of miners (weighted by their computing
> power) is honest, you can trust the accounting.

As computing power is a function of the expenditure of wealth, this is
equivalent to saying "as long as you trust the people who have thrown the most
money at having power over the bitcoin system are honest."

~~~
yk
Never thought of it that way, but yes. However, those who have thrown the most
money at Bitcoin are also those with the highest interest to seeing it
succeed.

------
bbbhn
Krugman doesn't understand Bitcoin. The computing power expended on mining is
used to secure the Bitcoin network.

There are many, many costs associated with securing the integrity of
established financial networks too.

~~~
jedberg
> The computing power expended on mining is used to secure the Bitcoin
> network.

Could you expand on this? I'm not sure I understand it. Thanks.

~~~
maaku
Miners choose transactions which obey the network rules. They then "vote" on
which transactions to commit by exerting computational power. To subvert this
collective decision making process would require a computation power at least
equal to the bitcoin network (bigger than any supercomputer). Therefore any
such attack would be absurdly expensive, and we can consider confirmed bitcoin
transactions to be secure.

~~~
dragonwriter
> To subvert this collective decision making process would require a
> computation power at least equal to the bitcoin network (bigger than any
> supercomputer). Therefore any such attack would be absurdly expensive, and
> we can consider confirmed bitcoin transactions to be secure.

There are plenty of organizations that, if they wished to mess with bitcoin,
could easily afford more computing power than the bitcoin network (yes, even
though that is "bigger than any supercomputer".)

Included in these organizations are ones (such as the US government) that have
been accused by some of bitcoins proponents of being actively attacking
bitcoin.

So why should we consider confirmed transactions to be secure?

~~~
maaku
No one considers them to be absolutely secure. Rather there is a calculable
cost to subverting the network, currently measured in the millions of dollars
and growing. Having the cost of reverting a transaction be $X,000,000 is
sufficient for most purposes.

------
parasubvert
I think Bitcoin is useful as an experiment in economics and monetary systems.

But the thinking is far from baked and opportunists are jumping on this so
quickly that a lot of money is going to be lost, .com-style. Maybe not with
Bitcoin, but perhaps with its successor. And a lot more money than the .com
bust, because now we're not dealing with just "new economy" utopias, we're
dealing with 100+ year ideological disagreements.

Just looking at the comments here, most people seem to have received their
economic eduction from political rants and newspaper editorial pages rather
than reading (and understanding) a few classics (Keynes, Marx, Minsky, Hayek,
Schumpeter, or even Polanyi and Drucker).

This is not to say the profession of economics is noble or even has any real
use to the modern world currently, given its problems. But we do have an
economic system, and some people do seem to have a better empirical
understanding of it than others. And I'm not seeing a lot of empiricism here -
lots of emotion, angst, rebelliousness, armchair theorizing, and hope. That's
a good way to start something, but it's not a great way for it to finish the
way you want. Ask the Marxists.

------
tatsuke95
> _Whatever Kurgman says, it is good to keep in mind that he is an economist
> turned partisan-politics hack._

Funny thing,I called MG Seigler a hack, and was attacked. Even PG came out of
the word works to say he was "embarrassed" by the comment. Now we are calling
Nobel prize winning economists hacks and asses?

The economic illiteracy of this place is what is embarrassing.

~~~
aristidb
This should have been a reply. Attacking somebody else's comment by citing him
in a new top-level comment is bad form.

------
croddin
What is the opportunity cost for bitcoin mining using different techniques?
(ie the next most valuable thing that can be done with the hardware). I would
guess it is a small fraction of the value of a bitcoin. I'm pretty sure it
didn't cost bitcoin's market cap of ~1 billion in computing resources to mine
all of bitcoins we have today. I wonder what it did cost?

------
Glyptodon
I suppose he actually compared the costs of mining with the costs of minting
paper money? Because that sure seems to missing...

~~~
penny500
How much does it cost to change bits of data on a computer? That's what
happens with quantitative easing. Bernanke isn't calling up the printing
presses to print $2 trillion in paper currency.

~~~
kirian
Central banks and central bankers don't work for free. How much is spent on
normal banking infrastructure, cash security vans, fraud protection etc.

~~~
penny500
That's not how quantitative easing works. Quantitative easing doesn't fire up
the printing presses. Bernanke can add $2 trillion into the system within 15
minutes, and no paper money is printed or manpower expensed aside from a few
clicks on a computer mouse. Once you secure your financial system network,
adding currency adds virtually no costs relative to the amount of currency you
put into that system. You've already secured the network.

It's akin to Facebook's security system. It works the same regardless if it's
100 million users or 1 billion users.

~~~
kirian
My point is that fiat money systems have costs associated with them. I'm not
arguing that the costs change if there is Quantitative easing or not.

