I guess Gary North and I have a public disagreement underway. I respect the man’s work, so I’ll try to avoid this becoming personal.
Gary’s new piece is entitled Bitcoins: The Road to Investment Hell Is Paved With Good Intentions. In it, his primary argument is that Bitcoin doesn’t pass muster as “money,” according to Austrian economic theory.
Here We Go…
I’ll start by responding to a few of Gary’s assertions, and then I’ll delve into the economic arguments. Again I’ll quote Gary in italics and respond in a plain font.
I can say this: nothing in his defense of Bitcoins [sic] as money is even remotely Austrian. It ignores the market.
Bitcoin is nothing BUT market. There are no legal tender laws enforcing its use, there is no 5000 year tradition behind it. Without the market, Bitcoin would be inert computer code.
What I am waiting for is a detailed defense of Bitcoins [sic] from an Austrian school economist or economic historian. I want to see how the Bitcoins [sic] market corresponds with the Austrian school’s thesis of the regression theorem: money as a market product that has come in response to the transition of a widely used commodity into money.
Here it is, in no uncertain terms. The Menger-Mises regression theorem was good for its day, but we live in a New World Order, a world of digits. Now we must abandon the old Menger-Mises theorem.
I did not say that Menger or Mises should be abandoned. I think that would be foolish. But we are dealing with a new type of currency, and it needs to be judged against the real world.
But, perhaps I wasn’t clear enough. One point for Gary.
He says that “Bitcoin is nothing but the operation of market forces – there is zero coercion involved.” True. But it is not money.
“Bitcoin is utterly decentralized – there is no center at all.” True, but it is not money.
“Bitcoin is utterly unplanned – it involves a million people, all doing their own thing.” True, but it is not money.
The argument here is over the definition of “money,” and it has nothing to do with how Bitcoin is used in real life. Again, more below.
[Bitcoin] is in the midst of a mania – the desire to hold digits, in order to make money in dollars. Digits are the asset. The dollar is money. It is not the other way around.
Not to be rude, but when an advocate of sound money holds up the dollar as real money, it’s time for that person to take stock of him or herself.
Is Bitcoin a mania? I don’t see it that way; but honest observers may disagree. There have been several “crashes,” and very few bitcoiners panicked. The reason, as I see it, is that they want to use the currency. It’s simply better money.
It is clearly an investment. It is in a mania stage. He can close his eyes, clap his hands, and say “Tinkerbell is not an investment,” but she is.
Tinkerbell aside, Bitcoin is not an investment in any proper sense. (It doesn’t produce, has no income, expenses, etc.) If people treat it as one, as some must be doing, that’s their problem.
Mr. Rosenberg calls himself a cryptohippie. He runs a cryptography service called Cryptohippie (www.cryptohippie.com). My assessment: its name targets a narrow audience: hippies who are interested in crytography and privacy. This is not the average Joe.
Our customers do value privacy, but they come from all across the spectrum, including many investors and even a surprising number of grandmothers.
This is Austrian school monetary theory. Accept no substitutes!
I like the Austrian School too well to treat it as an idol.
The crucial economic issue is the imputation of value by investors and owners of Bitcoins [sic]. What motivates them? A fast buck! A lot of fast bucks! Bucks are money. Bitcoins [sic] aren’t.
The people I see in Bitcoin (and I suspect that I see more of them than Gary does) are in it for the long term. They USE Bitcoin. When they find that their bitcoins buy more goods than before, they spend some of their Bitcoin on those things but continue to accept it as payment from others. They USE it.
And none of this proves anything about Satoshi’s intent.
Bitcoins [sic] did not go from a price of $50 for 10,000 in 2009 to the price of an ounce of gold in late November 2013 based on what the mysterious Mr. Nakamoto thought he was doing.
Precisely! The market did that. No coercion was involved. Tradition wasn’t involved. People had to WANT Bitcoin, and they had to overcome plenty of intimidation along the way.
To the cryptographers who want to be Austrian school economists, I say this: begin with Menger and Mises on the origin of money. Do not begin with Mr. Nakamoto.
That is a very good point. Let’s look at that for a moment.
- The Menger-Mises Regression Theorem is first and foremost an observation of how money came into being historically, without coercion.
- It should also be noted that there’s a big difference between what people treat as money and what should be money from an Austrian perspective. Confusing those two is to go from an is to an ought.
- There are two components to valuing something as money. One is through its perceived usefulness as a commodity; the other is the perceived usefulness as a medium of exchange.
- It could be argued that Bitcoin lacks any perceived usefulness as a commodity (which might be misguided) while at the same time increasing in perceived usefulness as a medium of exchange, which increases the price. This is true of other “monies” as well – the USD, EUR, and specifically for the Chinese currency, where we can see a spread and price increase because of it is increasing usefulness.
- It isn’t suitable to fall back on the regression theorem. It would be of value in a coercionless world, but that is not where we live. We live in a world where currencies are used as money and are backed by coercion.
- The real game changer is that Bitcoin is useful as a medium of exchange without coercive protection.
- As some people come only for the price increases, two price components are created: perceived usefulness as a monetary instrument, and speculating for price increases.
- Speculation may be a misguided approach, but as Austrians, we assume that the market will find a price that satisfies the market.
- Speculative price increases create problems for Bitcoin’s use as a monetary instrument, but these problems are symmetric, very much like they are in deflationary periods of currencies. When the Swiss franc rises due to EUR or USD issues, it does not become less ‘money.’
- Price adaption for products sold for bitcoins is the reaction. Prices in Bitcoin fall more dramatically than the price of Bitcoin increases, because the speculative view of Bitcoin holders can also be found in Bitcoin seekers.
- At some point, we will have a price overstep and a correction. That’s exactly what we see everywhere else. The difference is that the Bitcoin market is still small, and that uncertainties (regulation, etc.) are still looming.
- From a “properties of money” perspective, Bitcoin qualifies in more ways than the dollar. And it is more useful than gold in the current environment, at least in the West.
One more question: Did the dollar stop being money when the gold window was closed and it escaped the Austrian regression theorem?
I’ll close by repeating my primary point in this discussion:
What’s important about Bitcoin is NOT the price but that it bypasses coercion.
Bitcoin is Freedom Money.