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Krugman's Baby-Sitting Co-op Explains The Design Flaw At The Heart Of Bitcoin

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Re: Krugman's Baby-Sitting Co-op Explains The Design Flaw At The Heart Of Bitcoin

#31

Post by danielweber »

1053r wrote: post #18
ph0rque wrote: post #13

Can someone pro-bitcoin provide a counterpoint to the deflationary spiral criticism? I don't have enough of an understanding in economics to think of one.

The flaw in the argument is that BitCoin is not (currently) a unit of account (we don't price contracts or goods or services in BTC), and is (nearly) infinitely divisible. So even if 90% (or 99%) of all BTC is being hoarded, the other 10% (or 1%) can be divided up for use in transactions. That much speculations will cause wild gyrations in value and massive short term volatility, but the people using BTC to transact…

That's using Bitcoin merely as a payment mechanism, where both the buyer and the seller hold onto it for as short a time as possible.

Re: Krugman's Baby-Sitting Co-op Explains The Design Flaw At The Heart Of Bitcoin

#32

Post by drcode »

snowwrestler wrote: post #24

The key point is that bitcoin is not actually a currency (like the dollar or euro), it is a commodity (like gold or silver). Thus it will be subject to speculative bubbles and unpredictable swings in value, and the typical holder will not be able to do much about that. Central banks and fiat currency remove the danger of speculative bubbles...or at least, they centralize the danger to a single, publicly controlled en…

> they centralize the danger to a single, publicly controlled entity.

Come to think of it, we should centralize the backbone for the internet in the white house basement, so that we "centralize the danger to a single, publicly controlled entity."

Re: Krugman's Baby-Sitting Co-op Explains The Design Flaw At The Heart Of Bitcoin

#33

Post by unoti »

wwweston wrote: post #28
dmm wrote: post #5

To me it seems the problem with the Babysitting coop was price fixing. The price of of an hour of babysitting was always 1. If the price of an hour of babysitting was allowed to float you would not have the shortages.

Float compared to what? The price of an hour of babysitting was always 1 because the only thing on the exchange is an hour of babysitting. I suppose you could argue some hours of babysitting are more valuable than others, and people could negotiate, say, 4 hours for 5 coupons or vice versa. It's not clear this either (a) wasn't already done on some ad hoc basis (I'd imagine if it was agreeable to both parties, it'd p…

Float compared to supply and demand in a free market. Instead of issuing 1-hour coupons, they should have issued an arbitrary currency, say, Shillings. Then buyers can request babysitting paying at 1 shilling per hour, and sellers could say that they want 1.3 shillings per hour. The value of the currency needs to float with supply and demand.

The whole argument in the article is a pathetic straw-man. The value of bitcoin floats with supply and demand. When the supply is fixed when bitcoins can no longer be mined, then the supply is based on how much is circulating vs being held.

Re: Krugman's Baby-Sitting Co-op Explains The Design Flaw At The Heart Of Bitcoin

#34

Post by rayiner »

crazygringo wrote: post #26
Jtsummers wrote: post #10

Earlier quoted context omitted.

See the original Krugman article. It goes further into explaining efforts to try and rectify their economy, as well as a general discussion on the principles involved.

Well, right. They added more coupons, which fixed the problem. But I don't see how that's significantly different from allowing the price of babysitting to float -- I know doubling the number of coupons isn't exactly the same as making them half as valuable, but it's similar. But since bitcoins simply adjust in value according to market demand, I, as well, don't understand how Krugman's story applies to bitcoin. If e…

Allowing the price of baby sitting to float relative to what? It's babysitting all the way down.

That's one of the great things about this hypothetical, is that it forces you to think of the underlying barter transactions instead of misleading yourself into treating the currency as having intrinsic value.

Re: Krugman's Baby-Sitting Co-op Explains The Design Flaw At The Heart Of Bitcoin

#35

Post by ChuckMcM »

dmm wrote: post #5

To me it seems the problem with the Babysitting coop was price fixing. The price of of an hour of babysitting was always 1. If the price of an hour of babysitting was allowed to float you would not have the shortages.

Think about that in somewhat more pragmatic terms. Lets say Alice babysits for Bob for 1 coupon per hour. And hoards coupons. Over time as the supply of coupons becomes more precious she can charge larger and larger 'rates' for her services. Eventually she has all the coupons and nobody else can get any baby sitting.

At which point we discover her maiden name is Bernanke! And she has set herself to be the central bank of babysitting coupons, which she will loan out but only at extortionate rates bwa ha ha ha!

Basically if someone has all the currency then you can't really make a market with it. Even if the prices fluctuate. Long before the market shuts down it becomes very inefficient.

Re: Krugman's Baby-Sitting Co-op Explains The Design Flaw At The Heart Of Bitcoin

#36

Post by gwern »

forgingahead wrote: post #6

In 1998, Krugman also predicted that "by 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's." http://web.archive.org/web/19980610100009/www.redherring.com...

http://www.reddit.com/r/Bitcoin/comments/1bl0jd/in_2011_paul...

Re: Krugman's Baby-Sitting Co-op Explains The Design Flaw At The Heart Of Bitcoin

#38

Post by bdr »

ph0rque wrote: post #13

Can someone pro-bitcoin provide a counterpoint to the deflationary spiral criticism? I don't have enough of an understanding in economics to think of one.

Just because an asset perpetually appreciates does not mean it has a present value of infinity. I hope to write a deeper rebuttal soon in the form of a blog post.

Re: Krugman's Baby-Sitting Co-op Explains The Design Flaw At The Heart Of Bitcoin

#39

Post by ars »

1053r wrote: post #18
ph0rque wrote: post #13

Can someone pro-bitcoin provide a counterpoint to the deflationary spiral criticism? I don't have enough of an understanding in economics to think of one.

The flaw in the argument is that BitCoin is not (currently) a unit of account (we don't price contracts or goods or services in BTC), and is (nearly) infinitely divisible. So even if 90% (or 99%) of all BTC is being hoarded, the other 10% (or 1%) can be divided up for use in transactions. That much speculations will cause wild gyrations in value and massive short term volatility, but the people using BTC to transact…

That is not a flaw in the argument - that is a flaw in your understanding of the argument, which makes you think this is a valid rebuttal.

Money is supposed to represent value. Not to actually be value. There are new humans arriving in the world all the time. And new resources are being mined from the earth, and created intellectually all the time.

If the money supply does not match these new things then the currency fails.

You can't just do a "currency split" and issue more notes - doing that effectively tells everyone their resources are half as valuable which is clearly wrong - the value of the resources didn't change.

You need to issue more currency so that the sum total of money available is equal to the sum total of value in the world. Any currency that doesn't do that fails.

Re: Krugman's Baby-Sitting Co-op Explains The Design Flaw At The Heart Of Bitcoin

#40

Post by tlrobinson »

"Now, it’s worth noting that this fatal flaw of Bitcoin is not a fatal flaw for all cryptocurrencies or algorithmic currencies. One can imagine a Bitcoin-like currency with a smart algorithmic central bank (indeed, Bitcoin does have an algorithmic central bank–just an economically illiterate one)."

It's also worth noting that it's theoretically possible for Bitcoin's "monetary philosophy" to change over time.

If a majority of Bitcoin miners, and thus (in theory) the "economic majority" (https://en.bitcoin.it/wiki/Economic_majority), agree on changes to the system (for example, the rate of mining) everyone can migrate to newer versions of the software that will accept those rules, and those who don't will risk their version of the blockchain not being accepted by the majority of users.

One interesting question is what happens if there's a fairly even split between the group that accepts the old and new rules. Would the value of each blockchain be effectively halved?

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