That’s the title of my latest piece at The National Interest. The blurb sums it up pretty well. Under the efficient-markets hypothesis, a worthless digital currency should have never gotten off the ground.
That’s the title of my latest piece at The National Interest. The blurb sums it up pretty well. Under the efficient-markets hypothesis, a worthless digital currency should have never gotten off the ground.
93 thoughts on “The Bitcoin Bubble and a Bad Hypothesis”
I am sorry, but sometimes I feel like libertarians are morally naive in a childlike manner and that I thus have to explain social morality to them kindly and patiently as I would to a child. But I will use grown up concepts.
Broadly speaking, dangerous or deceptive goods are immoral. This ethic may be said to derive from the Golden Rule. The Golden Rule or ethic of reciprocity is a maxim, ethical code or standard of morality that essentially states the following. One should treat others as one would like others to treat oneself. The corollary: One should not treat others in ways that one would not like to be treated oneself.
None of us of who is of sound and healthy mind likes or wants to be sold dangerous or deveptive goods. Thus none of us should sell dangerous or deceptive good to others. Dangerous and deceptive goods can damage or destroy any or all of life, utility, happiness and freedom. Thus they are anti-life, anti-utilitarian, anti-felicitous (for want of a better term) and anti-freedom.
In practical terms, (coming down from “pure” morality to custom and law) a general principle of our Law (common and legislated) is that all is permissable except that which is explicitily proscribed by law or regulation or which does not meet explicit prescription by law or regulation.
It is the accumulated set of community and customary determinations, especially in a democracy, that decide what specific laws and regulations we have to meet our general understanding and consensus (conscious and unconscious) that the Golden Rule is the only valid and workable underpinning of social morality and workable reciprocities in human affairs.
Broad categories of goods like “drugs” or “currencies, pseudo-currencies and virtual currencies” admit of a wide spectrum of both uses and dangers, of goods and ills in other words. Thus we tend to have a wide spectrum of control for individual items in those categories from ‘free sale and use’ to ‘restricted sale, access and use’ to strongly controlled to strictly prohibited. The determination of a each case is made on a case by case basis by one or other of our democratic or administrative agencies. Not all of these determinations are perfect or undebateable but many cases are also quite clear-cut.
It is clear in many cases why we restrict substances or restrict financial instruments to lesser or greater degrees on a case by case basis. It is clear that many of these restrictions exist to restrict to proscibe dangerous and deceptive goods that can damage or destroy any or all of life, utility, happiness or freedom.
What about my thesis that without taxes and social safety nets (state) the money would keep accumulating in smaller and smaller percentage of population while leaving majority without money which would destroy economy/ living standards? Is it correct?
All of history shows your thesis is correct.
this got in as did another.
A big scetion on R&R as well.
At present Bitcoin is a small economic curiosity so is harmless, techno and interesting. Tamagotchi money perhaps; not really a threat to anyone.
However, it is also a facilitating mechanism for doing certain sorts of deals that are already illegal like drug dealing and tax avoidance. As I see it, sooner or later someone will want to stamp on it for this, eg, making Bitcoin transactions above $1000 reportable and requiring tax auditability on all transactions. Law enforcement isn’t 100% effective but it would certainly take the sheen of Bitcoin. They didn’t get Al Capone for bootlegging, extortion or murder, it was good old tax avoidance.
Taking it up a level, if Bitcoin ever developed into a major transnational currency the change is almost impossible to contemplate. It would more or less eliminate the potential of governments to control “their” economies, something like a global eurozone of wildly different economies and an always-on global Asian crisis. This might be naively appealing to some people, and gameable by others, but I just can’t see it happening in reality. I’d expect the full force of the state to hit Bitcoin transactions well before this happened. Bitcoin’s key user base – drug dealers, techo-libertarians and crime syndicates – aren’t likely to do much save it. OTOH, they let CDOs happen so who knows?
So if I would like others to sell me drugs and digital currencies then it is okay for me to sell them drugs and digital currencies.
As I said it is not immoral to buy and sell drugs or to invent a digital currency or to buy or sell such a currency.
Nor is it immoral to buy or sell dangerous goods. I routinely buy petrol and I don’t regard this as immoral.
Could you please answer my last question about accumulation of capital in ever smaller percentage of population?
Jordon – I did answer your question. See two up from your latest post.
As an aside the following link shows two charts which look at income for poor people in countries with high levels of economic freedom versus in countries with low amounts of economic freedom.
The top chart shows that in countries with high levels of economic freedom the poorest 10% of people only receive 2.58% of national income. However for the countries with the low levels of economic freedom the figure is 2.47%. In other words economic freedom appears to have no impact on how much of the income pie the poor people get.
The second chart shows that poor people do better in countries with high levels of economic freedom.
Let me know if you need me to explain it further.
Yes I know that your question was about wealth not income but I had this link handy and thought it useful to share it.
You did not read or did not assimilate the detail of my argument. If you had you would realise I have dealt with such issues. Petrol is both a useful and a dangerous substance. As such we have have many safety laws and regulations dealing with petrol. In our current economy we must use it and must trade it but we must also use it and trade it safely. Petrol is marketed, it is also regulated in a great number of ways (mainly in terms of safety issues).
Your solipsistic application of the Golden Rule is faulty. That’s like a sadomasochist saying I like being hurt so it’s ok for me to hurt others. The Golden Rule in society is not applied solipsistically but socially and communally.
“Drugs” is a broad category but you continue to use the word without qualification or specification. Many drugs, even therapeutic drugs, are controlled as their proper uses are beneficial and their improper uses are harmful.
You seem to think the whole social and civilizational world revolves around the market and that the market is some kind of obviator of all other concerns; that if everything could be bought or not bought at individual wish in the market then all the problems of the society would be solved. This is so simplistic and naive I am just flabbergasted. I don’t think I will waste any more time debating with libertarians. Like all fundamentalists they reason from blind belief not from empirical observation and logical analysis.
Your putting words in my mouth. I never said anything like that.
No, you did not answer the question. And i do not intend to get into arguing about whether you did or not while you avoid the answer.
That chart does not say how economic freedom is defined and if they use only income earners while presenting it as all population (poorest 10%).
As we all know that the most prosperous countries today are in northern Europe which by your definition of economic freedom that suposedly means lowest taxes are the least free.
If you want to use definitions that are not controlled by you (do not know them) then everyone can lie to you if it is sofisticated enough.
I know that those countries with the least economic freedom (highest taxation and strongest social nets) are the most prosperous/ lowest Gini coeficient.
You still did not give the answer.
@Jordan accumulation of capital in ever smaller percentage of population! I assume you contribute to a super fund. Retirement savings and similar funds own the majority of the share and bond markets.
Marx predicted the growing misery of working people would lead them to revolt.
I agree with G.A. Cohen that there is no group in advanced societies united by:
1. Being the producers on which society depends;
2. Being exploited;
3. Being in conjunction with their families the majority of society; and
4. Being in dire need.
Because of the rather unforeseen withering away of the penniless proletariat, Marxism failed to predict the natural course of the evolution of capitalism.
to quote Brad De Long at his best:
You are glorifing what was achieved by fiscal transfers and then claiming that fiscal transfers are bad.
Yes, Cohen is mostly true, but that is situation with FT, not without it. What would situtation look like without good FTs you have to go far back in history to find times without FT and there is almost no times like that.
Then the only comparable situations are to compare a single country across different times of strength of fiscal transfers, or you can compare present countries with various degrees of fiscal transfers. You will find that countries with highest rate of fiscal transfers like in northern Europe are the most prosperous while those with weak fiscal trasfers like in south of Europe are with low prosperity.
Conclusion is that fiscal transfers are needed for prosperitiy of a society and there is no indication that there is a limit of how high level of fiscal transfers will cause the opposite effect.
Jordan, you have the order reversed in the rise of the welfare state. take sweden.
Assar Lindbeck has shown time and again that ‘Sweden became a rich country before its highly generous welfare-state arrangements were created’. See http://www.project-syndicate.org/commentary/the-three-swedish-models
Sweden moved toward a welfare state in the 1960s, when its government sector was then about equal to that in the United States in size. Sweden was one of the fastest growing countries between 1870 and 1960.
Swedes had the third-highest OECD per capita income, almost equal to the USA in the late 1960s, but higher levels of income inequality than the USA.
By the late 1980s, government spending grew from 30 percent of gross domestic product to more than 60 percent of GDP. Swedish marginal income tax rates hit 65-75% for most full-time employees as compared to about 40% in 1960.
Swedish economists encountered a new phenomenon that they named Swedosclerosis:
1. Economic growth slowed to a crawl in the 1970s and 1980s.
2. Sweden dropped from near the top spot in the OECD rankings to 18th by 1998 – a drop from 120% to 90% of the OECD average inside three decades.
3. about 65 per cent of the electorate receive (nearly) all their income from the public sector—either as employees of government agencies (excluding government corporations and public utilities) or live off transfer payments.
Sweden is a classic example of Director’s Law. Once a country becomes rich because of capitalism, politicians look for ways to redistribute more of this new found wealth to the middle class. so was the USA in the 1960s on a smaller scale.
National fiat currencies are protected from competition by the fact that they can be used to pay taxes, but bitcoins have no such protection. Apart from perhaps nostalgia there is no reason for people to prefer bitcoins over more or less identical competitors such as Radcoins, Ronald Dollars, or the iQuatloo.
John, Tom Sargent, George Selgin and Bruce Champ have all written on the minting of private coins and private scrip money. Chronic shortages of small coins and small denomination government bank notes have occurred throughout history.
A shortage a small denomination pesos is common in the Philippines, especially around election times when politicians need them to bribe voters, so taxi driver rarely offer change
The economics of coinage amd monetary demoninations has a long history. Adam Smith advocated the banning of small denomination bank notes because small denomination bank notes are less likely to be redeemed for gold. Redemption as a discipline on monetary inflation is lessened if the government can issue larger amounts of small denomination banknotes.
Hoarding was originally of coins whose copper or silver value had become greater than their exchange value because of inflation. Indian rupees are currently spirited across to Bangladesh to be made into razor blades.
Selgin has built on his long book on private mints to write on bitcoins and Swiss dinars in Synthetic Commodity Money. A summary by Matt Ridley is at http://www.thetimes.co.uk/tto/opinion/columnists/article3743384.ece who also mentions that mobile phone credits are used as a currency in Africa.
The supply of pennies was taken over by privately minted coins in the UK for 20 years from the 1790s. The private coins were backed by a promise to redeem them in gold. there were 20 private mints by 1818 when they were banned.
Bruce Champ has written on scrip money. Bank failures, bank runs, and bank suspensions cause and exacerbate cash shortages in the 1930s and earlier times. Municipalities, civic and business organizations, and individuals stepped in to issue scrip money.
Mining, limber and canal companies issued script money to pay workers. They shared the seigniorage and redeemed the outstanding script for government banknotes later.
Irving Fisher even wrote a paper called Stamp Scrip. Stamped script were a few of script money in the 1930s in the USA, Germany and Austria that was also time-dated to encourage spending.
Most currency in the 1800s in the USA was private banknotes. The newspapers of the time carried daily tables listing the discounts on the face value of these competing private banknotes based on how familiar they were, how far away was the issuing bank and other risks to acceptance.
It took government’s centuries to supply coins at a level that met transactional demand. The market was able to do it overnight.
It might not be easy (or even possible) to restrict bitcoin trading as it is a peer to peer network. Just as the torrent of bits are. All the holywood looby has tried to shut it down and it is still up, because it’s decentralized
I’m no economist (neither was Marx) but I think Marx was wrong because he did not expect that the Capitalists would also compete amongst themselves, thereby raising the wages values for the good employees. Also, he did not foresee that, in searching for a greater profit, capitalism also brought us more efficiency and cheaper processes that enables goods to be produced for a fraction of what they were produced for a few years back. Mass producing and the like have made it very cheap indeed for people to have access to all sorts of things so even if capitalism generates some inequality, it also makes the economy much more efficient so that even the poorest can afford a living, all brought about by the search for higher profits. That’s only if you are a below-average worker, however. If you are above-average, you have every chance of ascending socially and becoming richer – provided you are productive.
oh sweet lord galt, you are awesome. Jim Rose knows nothing of this theory of capitalism. He will be very happy to hear about your theory.
Have you read that book by Ayn Rand ? I saw on my facebook page the other day, “There are two novels that can change the life of a bookish young person; one is The Lord of the Rings and the other is Atlas Shrugged. One is a childish fantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippled adulthood, unable to deal with the real world. The other, of course, involves orcs.
I bet youo have not read Prof Quiggan’s book “Zombie Economics” have you?
I would urge you to read my comment again. I stated that I would be wary of confusing correlation with causation with respect to the US experiencing its most propserous times during the period it faced a marginal tax rate of 94%.
You then challenged me to disprove this correlation.
What I am saying is that you are claiming that this correlation implies a causal link. I would be careful of making such claims without convincing evidence.
“National fiat currencies are protected from competition by the fact that they can be used to pay taxes”
Quite right, they ‘can be used’ but are not necesarily used for this purpose because experts in some large legal firms together with proverbial Wall Street bankers find suitably ‘small’ sets of people who say they have a country and have politicians to create tax havens – at a fee of course.
So, Terje, libertarians don’t belief in private money, such as bitcoins. Why should anybody believe in libertarians when there is no clearer contradiction than that? I mean, one has to draw the line in the sand somewhere.
I don’t really understand the basis of your assertion. Plenty of libertarians believe in private currencies. I do. However so long as there is a state offering up an alternative and using coercive power to give it primacy (through taxation laws etc) then any assessment need to be made in that context.
If the government is giving away free ice cream I might like the ice cream and still loath the policy. Perhaps you think libertarians live their personal lives in some bubble trying to insulate themselves from ever touching products provided by the state, but that would be a rather naive and stupid characterisation of libertarians. Few of us have cut up our Medicare cards or ditched the use of fiat currency.
Libertarianism is a political philosophy not a lifestyle choice. It is a set of views on what government should and should not do. It isn’t a hippie commune.
o.k. I’ll file libertarianism under utopias in my mental ‘knowledge management system’.
(‘knowledge management’ – other than IT technical stuff – is filed in the same category in my head. Hope you appreciate the implications of the certainty of the finiteness of life of an individual for my radical method of solving puzzles.)
We had an abundance of private currencies circulating in Australia prior to 1910. It was not utopia but it worked.
What i wanted you to accept is that 94% marginal tax did not hurt prosperity if it existed at the same time. Not to show causation to the prosperity.
Why such policy causes prosperity i explained few times with Nominal Surplus Circulation and incentives such tax gives.
But those private currencies were backed by gold in their respective bank waults. And gold can never loose its value down to o since it has practical aplications too, unlike bitcoin that is not backed by anything of value, just by pure trust in the system.
These private currencies were slowly replaced by state debt (Treasuries) as value backing which were cut up in size and time by banks in order for public to find it useful. This state debt backed currencies is present monetary system while gold backed currencies are removed as too volatile and make prosperity dependent on ammount of gold that can be digg out of ground.
Gold backed currency is less useful then fiat currency.
No they weren’t. Banks were pretty conservative in terms of reserve ratios but none did 100% gold backing or anything like it. The private notes were more akin to the demand deposits that circulate via EFT today.
But i did not even say at what ratio the currencies were backed? I said they were volatile which includes the variable of the ratio.
The subsequent 100 years of fiat currency was far less stable.
The world did not get off gold untill 1933-1939. Most of the countries did in 1933. Untill that time you can not claim that fiat currency was the rule of the day. And even if you do start from 1913 when FED was formed then i wonder how do you define stability?
Looking from 1933 with exception of WWII which was caused by gold pegg and the debt burden that produced such bank collapse and unemployment which in turn looked at opposing spectrum of solutions: communist or fascist solution to capitalist crisis, i would say that stability was remarkably improved in next 70 years comparing to the line of depressions that were present in previous 100 years under old system.
Pre 1933 period had depressions every 20-30 years. Sure the depressions lasted lot less, but the level of misery was depressionary.
I really do not know how do you define stability????
Fiat was the wrong word. I mean government currency. The opposite of private currency which dominated in Australia pre 1910.
Feel free to share your definition of stability. And show how the private currencies pre 1901 were “too volatile”.
I am not afraid to explain my comprehension of terminology and to back my statements.
I will define the term at US example since i do not know Australian history.
By volatile private currencies i meant that banknotes of different banks would be used only in an area that is in a proximity to the bank and many times the areas would overlap and 20 dollar notes would have different values in the same place. Even the 20 dollar gold coins have different values and different weight. Even the values of a gold coin would change over time and also have different values in different places. Every teritory would be its own optimal currency area with market forces that determine its own value. Around gold mines the prices of goods measured in gold would be different then in other places due to market forces. In times of gold rush the gold would change its value.
Currencies were too volatile just on their own.
Then the banks would cover their expenses with issuing banknotes without adding the gold and that would make gold ratio uneven over multiple banks.
Can you have a federation with such a system?
Speading communication with railroad and roads the issues became unberable for any united consistency with such large teritories as USA. It needed more unified monetary system in order to remove trade bariers. You can draw a parallel with EU that used to have multiple currencies trying to make trade fllow easily. Just a mess.
The real reason for Civil War in US was uniting into a single currency market with Federal system while Confederacy wanted to keep their own private currencies in each state, hence “state’s rights” and slavery that Southern politicians claimed hiding the real reasons. Confederate politicians did not want to loose individual state banking power to print money.
Confederat wanted their “state right” to print money and distribute it which by federalizing it they would loose.
This is what is also happening in EU today. North is for more banking union under ECB while South politicians are against such loss of sovereignety of distributing money as they see fit.
North have higher taxes on rich and stronger safety net while southern politicians do not want that.
In order to have sustainable banking union under single currency they also have to federalize retirement, health, social systems which will provide required fiscal transfers. Before that they should have equal standard of taxes and safety net across the countries in order to make transitions easier. I do not think that is necessary but they do.
In order to have such thriving large economies like USA or Australia, or EU or China, you have to have standard on currencies equal accros teritories and time in order to have free flow of trade. It is the free market that demands such change 🙂
OK, so you’re not claiming a causal link any more.
You are now claiming a causal link again… in the immediately following sentence no less. I must admit I’m not sure what it is you are trying to say here when two adjacent sentences appear to contradict each other.
Yes, I did read your proposal of a hypothetical mechanism by which this causal link may have taken place.
Of course, Terje. It’s not as if we had devastating depressions in the 1840s and 1890s or anything, is it, or that the 1890s depression was so much longer and deeper than the one in the 1930s.
A fiat currency and central banking have really ruined it for everyone.
Causal link is side note and i wanted to show that it is not the main topic right now by explaining that causality came from somwhere else.
Just wanted to get agreement that high prosperity existed with 94% top tax which gives conclusion opposite to what neoliberal claim; that high top taxes hurt prosperity.
And i have never heard such concession from “free marketeers”
You want to keep avoiding such implications by conflating implications of a corollary and causality, nobody can stop you.
Well no, I am not disputing any historical data as it currently stands.
However, the correct counter-factual to your point would be whether prosperity would have been greater if the nominal marginal tax rate was lower than 94%.
I don’t know the answer to that. I’m sure that you have a very strong opinion on that question and that there would be opinions out there that would disagree with yours.
I assume you mean correlation where you have used the word corollary.
I am not sure what you are accusing me of trying to avoid or what you really mean by your last sentence.
*not sure of what
This is what i looked for. Thank you.
Don’t you think that implications of that should be included in today’s conversations? Or what history can teach us is not applicable?
I think that such implications are of the most importance to talk about at least to figure out how such policy affected the performance.
Since preveiling thinking is that taxes are bad, there is nothing to figure out about such policy since we already made up our mind, right?
How much better can be then already the most prosperous time in history?
If true that prosperity would have been better, it would be only marginaly better and rising inflation is showing that it was at the maximum.
I apologize for missusing the word corollary, i usualy do not proofread even tough i should.
Of course history is important and can teach us valuable lessons about the present. I suppose I am not as convinced as you appear to be as to exactly what the lesson to be drawn in this instance is.
If the lesson is that high nominal marginal tax rates and high economic growth are not mutually exclusive given a certain set of domestic and global macroeconomic conditions then I would wholeheartedly agree.
If the lesson is, as you seem to be claiming, that high nominal marginal tax rates cause high economic growth then I would find this position far less convincing. However, I am always willing to change my opinion in the face of evidence.
This is what I was getting at when I suggested you should consider the difference between correlation and causation. Correlation is relatively easy to demonstrate, causality is typically much, much harder.
Like all historical ‘what-ifs’, it is probably difficult to prove such a claim. I suspect that there would be people who would disagree with your opinion just as there may be those who agree.
People still see a future in bitcoin or its successor
“If the venture capital community wants to make bitcoin the “Next big thing”, staving off regulation by bringing the currency into the light is just as important as their other goals. Yes, the U.S. Treasury recently issued some guidance, essentially bringing bitcoin into the regulatory fold. At the same time, regulators do have the facility to make life difficult for bitcoin if they so choose.”
“In summary, bitcoin is what I would call a “Beta currency.” To the tech world, that means something that is still in development. It’s eventual success or failure is a technological challenge, mixed with business development issue”
Regardless of the ethics and merits of alternative currency systems, this looks like something that will need to be dealt with. Perhaps a government approved design (eg secondary private key to decode all transactions as per various key escrow proposals put forward by government for other cryptographic systems).