It has now become a familiar ritual. As soon as bitcoin’s price rises, a Keynesian economist will take the microphone and tell us that bitcoin is actually worth nothing as New York Times blogger Paul Krugman did when he called bitcoin evil without any elaboration after bitcoin reached its all-time high in late 2013.
Krugman, still licking his wounds from the complete defeat of the left’s economic and wider policies in the recent historical election, can hardly have much to say, so passing the baton to Dan McCrum, a journalist for the highly respected Financial Times and a former equities trader at Citi.
Instead of informing and educating his audience, as is his duty, McCrum tells us that even though the market is valuing one bitcoin at $1,000, it is actually worth zero. The reason apparently is because bitcoin is tiny compared to world GDP and its $16 billion market cap or hundreds of million if not a billion in day trading can effectively be rounded to zero. Regurgitating a tired and old debate, he concludes that it’s a ponzi scheme because for it to grow new value must come in. Presumably, this is different from the stock price of equities which increase because of new money, in the process creating new value such as cost savings or efficiency gains, thus incentivizing more investors to invest, until eventually it is replaced by something better.
McCrum, however, seemingly unaware, does make a very important point which goes to the heart of the matter. He states:
“The problem is that a medium of exchange prone to collapsing or quadrupling in price is useless as a practical currency, whatever the cryptographic elegance of its creation.”
In the past few months, the dollar has almost doubled in value against the pound, the yuan has lost considerable worth, Venezuelan Bolivar has become worthless, Argentina’s peso has lost 40% of its so-called value store, India’s currency, despite drastic measures, keeps going down, Brazil too, Nigeria, Russia, effectively the entire world, even gold.
Krugman or McCrum have no answers except for, ironically, a continuation of money printing which eventually leads to its own great structural problems and crisis. Hayek, a Nobel Prize winner for his work on the theory of money and other concepts in economics, could have described both as follows:
“[T]he older generation of bankers would probably be completely unable even to imagine how the new system would operate and therefore be practically unanimous in rejecting it. But this foreseeable opposition of the established practitioners ought not to deter us. I am also convinced that if a new generation of young bankers were given the opportunity they would rapidly develop techniques to make the new forms of banking not only safe and profitable but also much more beneficial to the whole community than the existing one.”
In now almost a decade since the near complete collapse of the monetary system created in part by policies advocated and supported by “the old generation of bankers,” we hear no solution nor how this can be avoided in the future. Instead, all we hear is name calling, but Hayek’s greatest insight in economics since Adam Smith’s Wealth of Nations does provide a solution:
“The past instability of the market economy is the consequence of the exclusion of the most important regulator of the market mechanism, money, from itself being regulated by the market process…only competition in a free market can take account of all the circumstances which ought to be taken account of.”
Once this insight is expressed, it appears obvious, but before it was expressed no one had thought of it, as he explains:
“When one studies the history of money one cannot help wondering why people should have put up for so long with governments exercising an exclusive power over 2,000 years that was regularly used to exploit and defraud them. This can be explained only by the myth (that the government prerogative was necessary) becoming so firmly established that it did not occur even to the professional students of these matters (for a long time including the present writer!) ever to question it. But once the validity of the established doctrine is doubted its foundation is rapidly seen to be fragile.” – Friedrich August Hayek in The Denationalization of Money [PDF].
The main premise of Hayek is that if money is centrally controlled it will inevitably be abused regardless of whether or not those in charge wish to so abuse it because special interests will force such manipulation for the interest of one industry or another. A premise that few can doubt considering the constant monetary crises we experience in our own countries and the wider world at various degrees from a small loss of value to a complete collapse through either hyperinflation or systemic collapse or near collapse of the entire financial system.
Hayek’s solution to these constant monetary crisis, on the surface in any event, was simple: competition through private money. Such competition, however, was never allowed. Any entity that attempted to create private money, so being centralized, was immediately shut down, probably because of a misguided belief by our elected governments that they were attempts to bypass human decency with the aim of solely engaging in criminal activity.
It is the same misguided view some take of bitcoin, somewhat justifiably, perhaps, considering the rhetorics of its supporters in bitcoin’s early days, but the currency, although it may appeal to many for various reasons, some of which the very vast majority do not approve of, was created, in my view in any event, not to bypass the will of the people or due to fringe and unworkable ideas, but to implement the mainstream grounded insight of Hayek for the betterment of us all, whether bankers, governments or ordinary citizens.
That gives bitcoin, on top of cost savings and increased efficiency, great worth, because Nakamoto has implement Hayek’s insight in a way that even the United States’ government now accepts bitcoin cannot be shut down. That makes it, excluding other similiar digital currencies, the only global private money in history, something which is surely worth far more than zero.
Now, we can certainly debate whether Nakamoto was right or wrong or whether Hayek was right or wrong, but to state that the great insight of a Nobel prize winner is evil or worth zero is to concede the debate before it has even begun.