Bitcoin Frenzy

I thought it was known as ShamCoin by now.

It is true that when I hear some talking about BlockChain that it sounds like the All-Digital God is coming to deliver us from All Things Bad. Maybe somebody should investigate how similar these arguments are to those once made for the existence of the Still-Analog God.

We need simple stories about real macro that can be assimilated into public consciousness. Maybe, with that in hard, we can get widespread advocacy for sensible digital money. Metallic currencies (we have found) don’t work very well. Why should electronic simulations of them work any better?

Which opens the question of what would work better. Somewhere, in some obscure journal or corner of the internet, there is probably some brilliant and mostly ignored economist who may have that answer.

Or again the statement ” modern states in effect have a monopoly over the currencies that markets need in order to work.” is just factually wrong. It’s a pity because the larger point seems right and important. But it was muddied when “the need for some form of political authority” gets conflated with the need for the specific form of the state.

What bitcoin is, is defined by the software, and the bitcoin community decides what the software does. So the community ends up in the Central Banker role, whether they want or not (and despite the notion that this role should not exist at all). The members of the community have three different roles (with overlap because members act in multiple roles): users of bitcoin — who use it as money, holders of bitcoin — who use it as an investment, and miners of bitcoin — who run the infrastructure that ensures the whole edifice works. In terms of power relations, I think the miners have the upper hand, and will be able to impose their terms should they feel the need to play hardball. And the set of miners is small and looks like it is shrinking.

To an outsider like me this doesn’t look like a long-term stable situation.

I thought that the value of fiat money issued by nations is that it can be used to pay taxes in those nations. Everyone in the U.S. (for instance) is going to have to pay taxes to the IRS, and the IRS only accepts U.S. dollars, so everyone is going to have to acquire dollars for this purpose. The money is in effect backed by the existence of the population and the state’s control over taxation of that population.

Rich, I invite you to contemplate two facts.

1. You can pay your taxes with money in your bank account — that is, by transferring to the government an IOU owed to you by your bank. And the bank can freely issue new IOUs to you, by making you a loan, without needing to first acquire anything from the central bank. So it is not the case that the state is the monopoly supplier of the medium used for tax payments.

2. A large fraction of international transactions are denominated in US dollars, even where neither of the parties has any tax liability to the US government.

The best general discussion of these issues I know of is this article by Perry Mehrling.

@JWM, i don’t quite see where those points would lead.

Some bank accounts are recognized as official US dollars, but only because the US government has decided to. Without that, a bank loan would have a similar status as a corporate bond. Valuable, exchangeable and possibly a close substitute for dollars, but not official dollars and you can’t pay taxes with them.

On the second issue: obviously you can do more than just pay taxes. Once a currency has some roles, it attracts other roles. But states bootstrap the currency into those first roles.

The Raven wrote:

Which opens the question of what would work better. Somewhere, in some obscure journal or corner of the internet, there is probably some brilliant and mostly ignored economist who may have that answer.

Cigarettes,, perhaps plastics.

The problem with trying to define one set of rules that stands unchanged for all time is that unexpected things happen, subtle flaws become apparent etc.

That’s why Constitutions have amendment processes, sports have rules committees, religions have theologians, and software has to be maintained.

I obviously don’t have any kind of expert knowledge of this, and I’m not an economist. I only had time to skim the Mehring piece (sure, that’ll be good enough) and the conversation will be over by the time I have time to actually read it, so I’m just going to blunder onwards. A critical paragraph seems to be:

“For monetary theory, so it seems to me, the significant point about the modem state is not its coercive power but the fact that it is the one entity with which every one of us does ongoing business. We all buy from it a variety of services, and the price we pay for those services is our taxes.”

All right. I’d actually known that most money is not “issued by nations” in the sense that the government does not print up a big stack of bills and rush them to the bank whenever a bank makes a loan, or make an electronic transfer. Forms of credit are involved. Perhaps it’s that national money is “associated” with nations? In any case, whether you view taxation as a coercive power or as the ongoing purchase of services, doesn’t the state create a demand for its money? You need a particular kind of money in order to buy those services. Having a fairly stable, predictable form of demand for the money is what backs its value.

For international transactions, perhaps I picked a bad example when I chose U.S. dollars simply because I live in the U.S. Most national currencies don’t seem to be used in a lot of international transactions of the type that U.S. dollars are used in, so in that role it’s kind of atypical.

“You may drive out Nature with a pitchfork, yet she still will hurry back.”
Horace, Book I, epistle x, line 24.

Jason,

I think you are right in saying ‘the market’ is mostly referred to for its God-like qualities. It is also not a coincidence that this blockchain movement started in creating something like “the perfect market”. Maybe they’re the Mormons of Hayekianism?

All that said, there really is nothing wrong with money, market, property in itself. They are perfectly natural phenomena that allow human beings to come in contact with each other; and the more human beings are intimately and extensively connected, the better it is. This just means as well that as human phenomena they’re open to the typical epiphenomena of abuse because of unbalance and, therefore, need for political agreement to balance things.

Glad to see Smith referred to, not so glad in the case of Schmitt.

And I think Maxwell is right, the reason for the tendency to theocracy, and that theocracy is then the worst form of government (because it holds abstract moral principles – interpreted by unaccountable agents of an inhuman power – as more important than our common humanity) is a flaw in human nature.

Flawed with respect to what? Inhuman nature?

Ah, money!

If you read a decent history of Sumeria, and then dabble a bit in international commerce, it becomes much clearer. Money originated as tokens of debts, various; and was then simplified by issuing most tokens in a standard unit of account. Coins came along a few millenia later as a convenient way of settling outstanding balances without getting personal, and were later appropriated as a good propaganda medium. Anyone can issue money, and does – from corner stores extending credit to bank letters enabling the purchase of shiploads of ore. Most of the fuss is about whose debt it is and how it ranks relative to other debts, and the competition is always about trying to swap weaker claims for stronger ones. That states are almost always in the strongest position vis-a-vis private parties is an irrelevant truism. And debt, of all kinds, is always politically mediated.

Bitcoin already obsolete. Why? Because the bitcoiners are working under one of the ancient premises of money which is now becoming obsolete.

The premise is that, abstractly speaking, money needs some sort of authority of creation, to keep it scarce. Why? Because it is used to exchange for things which are scarce.

And that is a premise we don’t even question: money needs to be scarce because goods are scarce.

However, that condition would change, if goods and services are no longer scarce. And this is happening, quickly. After millennia of hardship when necessary things were scarce, the end of scarcity is upon us. For purely technological reasons.

Thus the biggest problem is not scarcity, which is disappearing. It is our habitual “‘scarcity-psychology”: our ingrained habit of the previous millennia, which needed money-authority (whether public or private) to try to keep the medium of exchange as scarce as the goods.

It is not so strange that so many people find it difficult to think this all the way through. Scarcity-psychology is a very deep thing, a “psycho-socio-intellectual” complex of desires, intentions, ideas & theories that is a tough nut to crack. Leading academics and computer geniuses are still obviously trapped in these old desires and theories.

Anyway, I think this is the biggest flaw with bitcoins: money itself is quickly becoming unnecessary. Its creators and promoters are still ensconced in the old scarcity-psychology.

However, the abstract idea of blockchaining (apart from the bitcoining) is fascinating. Where else might it be used? Perhaps for a remaining, short-term accounting-function, to keep enough stocks in your local depot? (Rather completely boring, but also quite ancient. The function of local provisioning is another of the ancient, separate functions of money, that has been incorporated into all later redesigns.)

What else for blockchaining? I don’t know enough about the main algorithms of machine-learning to even make a reasonable guess as to whether it might be useful in the future, for various artificial intelligence purposes.

Perhaps we will use blockchaining to analogize some sort of already-existing society-wide brain function — a brain-function we already perform now, by positing that the sympathies and altruisms we derive from our own “mirror neurons” ought to have a social import. I.e. blockchaining not for scarcity, but for its opposite: love.

Then, blockchaining could make The Terminator into a big new facebooking love-button.

He brings the food around from the local depot. We dress him up like an ancient temple priest. He does bird calls; they fly to sit on his shoulders. He sings Verdi and Puccini. When it rains, he carries an umbrella.

Hi J.W. – without wanting to dive too deep into post-Keynesianism, it looks to me as though our disagreements mostly stem from different notions of what a currency is – I’ve a relatively narrow definition, and you want to have a wider. The political aspects of currency that I’m interested in have to do with the ways e.g. that the US is able to use the USD and clearing to exert direct political power via sanctions and influence on offshore banks (e.g. the kinds of things that Patrick Emmenneger writes about, or that Juan Zarate lauds). This is political economy in the political science economy sense – you seem to want to go towards deeper questions which is fine, but not what I am trying to do here. My point is simply that there is an important political difference between a system such as 21st c US where the government prints the bills, and 19th c US where a variety of private banks each had their own individual dollars, with exchange rates between them.

Tom – yep . From the piece:

The advocates of bitcoin got one thing absolutely right. Money is a confidence trick, a form of “frozen desire”, as the writer James Buchan describes it. We only believe in it because everyone else believes in it. So if bitcoin believers believed hard enough, and convinced other people to believe, they had a shot at making it generally accepted.

The sociology of money as belief has a lot of value as a way of thinking about Bitcoin.

Infovore – that’s all right and interesting. I wanted to work in something about concentration of power among the miners but couldn’t in 750 words. There is also a real risk of selection bias in my argument – I’m inevitably focusing on the chattier people, who tend to be the true believers. Who knows how the more quiet types who are just in it to squeeze out a few dollars are thinking?

Ok, thanks, Henry.

Other than this, what is there that will remain scarce?

Status.

We will always have some version of Adam Smith’s linen shirt, which is taking and will continue to take an increasingly large fraction of our spending:

A linen shirt … is, strictly speaking, not a necessary of life… But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty which, it is presumed, nobody can well fall into without extreme bad conduct.

Scottish banknotes are not legal tender anywhere. In Scotland in fact no notes are legal tender. Scottish banknotes are legal currency.

https://en.wikipedia.org/wiki/Legal_tender

Legal tender is solely for the guaranteed settlement of debts and does not affect any party’s right of refusal of service in any transaction.

In the 19th century, gold coins were legal tender to any amount, but silver coins were not legal tender for sums over 2 pounds nor bronze for sums over 1 shilling. This provision was retained in revised form at the introduction of decimal currency, and the Coinage Act 1971 laid down that coins denominated above 10 pence became legal tender for payment not exceeding 10 pounds, non-bronze coins denominated not more than 10 pence became legal tender for payment not exceeding 5 pounds, and bronze coins became legal tender for payment not exceeding 20 pence.

Throughout the United Kingdom, coins valued 1 pound, 2 pounds, and 5 pounds Sterling are legal tender in unlimited amounts. Twenty pence pieces and fifty pence pieces are legal tender in amounts up to 10 pounds; five pence pieces and ten pence pieces are legal tender in amounts up to 5 pounds; and pennies and two pence coins are legal tender in amounts up to 20 pence. In accordance with the Coinage Act 1971, gold sovereigns are also legal tender for any amount. Although it is not specifically mentioned on them, the face values of gold coins are 50p; £1; £2; and £5, a mere fraction of their worth as bullion.

Maundy money is legal tender but may not be accepted by retailers and is worth much more than face value due to its rarity value and silver content.

Bank of England notes are legal tender in England and Wales and are issued in the denominations of £5, £10, £20 and £50. They can always be redeemed at the Bank of England even if discontinued. Banknotes issued by Scottish and Northern Irish banks are not legal tender anywhere in England and Wales but can still be accepted with agreement between parties. Whilst banknotes issued by the Scottish banks are legal currency, that is approved by the UK Parliament, no banknotes issued by Scottish banks, Northern Irish banks or the Bank of England are legal tender in Scotland. Thus legal tender in Scotland is limited to coin as noted above, however notes issued by Scottish banks fall into a special category of promissory notes and are freely accepted within Scotland.

Only sentient beings can suffer, and only humans can suffer on a human level. Some enjoy the suffering of others, even many others — ‘it’s a statistic’ — yet the number of humans is finite, so perhaps there could be a monetizable scarcity in this realm.

I was trying to think of things only human beings can provide. Art, prostitution, suffering, death, cannibal fare. (Now I hear that sex robots are going to knock out the first. The kind of art we have in the Art World now can probably also be handled by machines.) Your pox vaccine would probably eliminate capitalism, anyway. So, what’s the plan?