Potpourri
==> I realized I haven’t been mentioning it here, but I’ll be speaking in Brooklyn on October 11 with a bunch of other people, including Naomi Wolf and Tom Woods. Here’s the info, and I think if you type in “MURPHY” you get a discount.
==> Bryan Caplan has an interesting post on the internal rate of return on Social Security for various groups.
==> Here is a great Scott Sumner post that makes sense of what at first seem like hard-to-explain market outcomes.
==> Speaking of Sumner, this guy Matt Bruenig’s latest volley is laugh-out-loud funny. His style is like Walter from the Big Lebowski; Bruenig is acting like he’s so outraged at Sumner’s posts. I’m not saying Bruenig is making good points; I think I probably 85% agree with Sumner on the substance. But the post is funny, for this genre at least.
==> Mattheus von Guttenberg took me to the woodshed over my interview with Tom Woods (where we talked about Bitcoin). He sent me this article, and here is (I gather) the part where he thought I was being too wishy washy with Tom:
When I point out that Bitcoin necessarily must have a use value, people will frequently demand to know what it is. What could possibly compel people to spend hard-earned fiat money in exchange for digital tokens? Usually I suggest social purposes. Bitcoin – being a scarce, digital good – is unique in that creation of one requires solving cryptographic puzzles of increasing difficulty. Thus, in the early days, before Bitcoin had either money prices or exchanges – in Menger’s words, “organized markets” – the only way to acquire Bitcoin was from a friend or to download the client and mine Bitcoin directly. The protocol’s newness and its underground nature enabled Bitcoin to become a status symbol. Cypherpunks and hacktivists – those closest to understanding the value proposition it offered – began to acquire them and mine them (and report their electricity/mining costs on message boards), and from there eventually Bitcoin spread to other markets and social groups. That’s it. The regression theorem does not admit of quantitative tests (ie, “how much” value a certain item or commodity requires before mass acceptance) – it simply states the necessity for prior direct value. This social status value Bitcoin acquired is real. It is a value accruing to whosoever desires it. Hobbyists place value on all sorts of bizarre goods many people would never think to acquire. Even objects of pure fads like Beanie Babies offer real, legitimate value: they offer the value of social inclusion or of being “in the know.”
Historically, while this account suffices to describe Bitcoin’s launch into becoming a medium of exchange, it doesn’t quite answer the question as to why Bitcoin units are individually valuable to users. The answer to this is straightforward. Bitcoin as a payment system is valuable; it renders amazing services nothing else can. The only means to use the payment system, however, is through the use of Bitcoin units. Therefore, as the units themselves are scarce, required means of action, they command a market price. Users are willing to purchase digital space on a ledger in order to take advantage of the manifold benefits they enjoy. The network cannot transfer dollars, euro, or yen. It can only move Bitcoin.
Understanding the Bitcoin units in the larger context of utilizing the Bitcoin network brings clarity to confusion. There is no contradiction or paradox in Bitcoin becoming money; it emerged as a scarce, digital item, which became a good (when scores of people began acquiring and discussing them), and then proceeded to become a medium of exchange (when it was used to indirectly purchase pizza). Whether it becomes liquid enough to crowd out the rest and become money to everyone will have to be seen, but it should be apparent that, from an Austrian perspective, there is no problem whatsoever with global Bitcoin adoption.
I didn’t even know that Mattheus listened to Tom’s show. I was going to forward it to him because I was aware of what was in his article (and what you said in the interview), but perhaps somebody else did.
I came upon the service aspect of direct use value regarding Bitcoin back around November/December last year. I’m sure you remember me calling you about that, and you were nice enough to offer a few reading recommendations to help me better form a more fuller explanation. However, it took me a little while to get it entirely organized in my mind as to how to think about the Bitcoin service and its bitcoin units. I still don’t have a full theory yet, but I’m definitely working on it. I did expound a bit on my thoughts in this thread, however:
http://consultingbyrpm.com/blog/2014/06/a-conversation-on-bitcoin-gold-and-music.html
With that said, I’m happy to see that Mattheus, Jeffrey, and I–as well as some others–all arrived at the same explanation (essentially). It’s always good to have some reinforcement that my ideas aren’t completely out to left field. But I know that you’re still hesitant to accept this explanation just yet, but like I said, I’m still working on it. Once I get it finalized, you’ll be the first to know.
Yep I definitely remember you talking to me about it.
June 2013:
http://consultingbyrpm.com/blog/2013/06/my-econlib-article-on-bitcoin.html#comment-66181
Actually Timothy Terrell refuted this nonsense in 2001, way before there even was a bitcoin. http://mises.org/daily/629/Is-Digital-Currency-Viable.
I elaborated on it with quotes from Mises here: http://smilingdavesblog.wordpress.com/2013/10/15/about-a-medium-of-exchange-having-to-be-in-wide-use/
The gist: a handful of guys bragging about their bitcoins is not enough.
As for the service of transferring money, Frank Shostak refuted that with a one liner, as elaborated upon by me here: http://smilingdavesblog.wordpress.com/2014/02/17/bitcoin-as-postage-stamp/
But hey, everyone! Bitcoin needs your help. It has lost 75% of its value in ten months, and is dropping like a stone right now. Save liberty, save the free market, and make yourself big bucks. Buy bitcoins like mad. If we don’t all make a small temporary sacrifice, bitcoins may well fall to zero by the end of this year.
So buy your child a bitcoin for the Holiday Season. Take up thirty gigabytes of his computer. He’s gonna love it, I guarantee.
I think bitcoin can become money, but, as Gary North pointed out, it presently has some severe competition-cash, coins, and debit cards (especially the first two). I don’t think these are going to disappear any time soon.
As I mentioned already, cops are doing their best to discourage cash by confiscating it arbitrarily, thus preventing it being used as either a store of value or a medium of exchange.
Gold and silver already attract a lot of government attention, and attract a bunch of tax.
Debit cards are fine if you trust the banking system, but they also attract non-trivial fees, so does PayPal while we are at it. Mind you PayPal provides an adjudication system and a security system which is something useful you get in return for your fees, so I’m not writing it off.
Anyhow, a competitive market is a good market, there should be competition, we want competition.
I agree with that sentiment, Tel. I would truly like to see competition in the world of currencies. The only problem is that there are state and central-bank monopolies on currencies, and most alternatives are typically regulated and/or banned by the current monopolies. I think that in going forward, that all alternatives will ultimately be either banned or regulated by these monopolies. However, in the case of Bitcoin, it is a rather interesting real-world exposition of a competitor coming to the fore.
Will Bitcoin last? Probably not. Will some of its successors? Probably so. Bitcoin may be the flavor of the day, but crypto currencies are certainly here to stay.
Time is ultimately the only measurement tool that we have when it comes to the longevity of particular goods/services in the market, but in this case, we’re dealing with a good/service that has already been monopolized the world over (i.e. the money). In the case of Bitcoin, it is essentially a response to that dynamic (a direct competitor), only it is so unusual to even the most educated monetary theorists not only don’t understand it, and most of the monopolist’s own economists are left putting up their hands in confusion.
This does not bode well for Bitcoin being an open-market sort of good/service. It will eventually be either regulated or outright banned. But the crypto-anarchists are a feisty bunch and they tend to be well-ahead of the curve. They’ll either come out with something new and/or better; meanwhile they’ll probably be using the same thing that is available today, only they’ll be doing so in the black market.
I have no skin in the Bitcoin game, but it is still very interesting to watch it unfold. As an outside party I can watch both the naysayers and supporters (of Bitcoin) battle it out, day in and day out, just as the market was supposed to be. However, if I may inject one very important observation: the naysayers have already lost, Bitcoin is already being used readily as a medium of exchange; and in some very small markets, it *is* the money.
So it is my opinion that the burden is upon them to either explain this economic phenomenon (not just decry it), or reconcile it with the regression theorem. They really have no choice at this point (no matter what the spot price of a BTC is on the exchanges).
My personal opinion is that Bitcoin is reconcilable with the regression theorem, and that the burden of proof is upon those who say that it is not, to prove their position; in opposition of the empirical reality.
In short: it’s currently happening in the economic world, now explain it!