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Adam Smith Hates Bitcoin

krugman.blogs.nytimes.com

81–90 of 102 posts

Re: Adam Smith Hates Bitcoin

#81
post #63

Earlier quoted context omitted.

I dont think bitcoin is fiat money. Fiat money is. any money declared by a government to be legal tender.[7] state-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard.[8] money without intrinsic value.[9][10]

It's not by definition a fiat money, but has similarities: - it is declared by a group of cooperating people to be a form of tender (legally protected only via contract law), - they effectively have no intrinsic value, - nor is it fixed in value to any objective standard It's effectively not that different from currency of the "free money" era in the 1700 through early 1800's, where there were hundreds, if not thousa…

I usually see the term "fiat money" used in the context where people are arguing that a central banks ability to control the money supply is either good or bad. Fiat money in that context is used as the contrast to something like the gold standard.

In this current context, bitcoin is more like the gold standard that typical fiat money. The supply of bitcoin can not be manipulated to manage the economy.

Re: Adam Smith Hates Bitcoin

#82
post #29

Maybe, just maybe, it's not Adam Smith who hates bitcoin like this misleading title suggest, but Krugman. The guy may have a nobel prize, but his strong leftist views seems to be clouding his judgement. Never before in history was there anthing like bitcoin. It's not a commodity like gold - is is pure fiat money, fully based on trust. Hoarding gold or silver or any metal or rare thing was a bad idea because of the al…

> Never before in history was there anthing like bitcoin. It's not a commodity like gold - is is pure fiat money, fully based on trust

That's what most currencies are today - symbols fully based on trust.

> In fact, by reducing friction, making transaction costs almost negligible, it will help this very thing!

What friction are you referring to?

> The only real problem is for governments, who won't be able to use the seignorage tax anymore, ie inflation, ie printing money out of thin air at the detriment of currency owners, to coerce people to do things or lose money.

There are a finite number of Bitcoins (21 million total), so yes, that would be one way to look at it. However, that would also lead to rampant deflation, which was associated with the Great Depression - rampant unemployment, social unrest, slow growth, etc.

Or, put another way, the governments currently prefer (out of the lessons of history) encouragement of investment, full employment, and growth ... over the rentiers (i.e. dead stock) sitting on their money, and letting everyone get poorer.

You seem also to be contradicting yourself, as easier you suggest:

> There is nothing inherent to bitcoin that may hamper a "country to convert a great part of this dead stock into active and productive stock".

Yet its finite nature actually does encourage dead stock -- rich holders sitting on piles of cash instead of using it for productive purposes.

> Bitcoin is a game changer, the end of a tyranny - the use of force to make people work, instead of being able to live with what they have without the fear that the government will decide to reduce the purchasing power of what one owns by 20% overnight, through inflation or plain just stealing (as in Cyprus) to "transfer that wealth", reverse Robin Hood style, to their well connected and too big to fall fat-cat friends.

Right, Bitcoin is far superior as it merely ensures that the current fat cats get fatter and skinny cats die of starvation due to deflation.

Re: Adam Smith Hates Bitcoin

#83
post #81

Earlier quoted context omitted.

It's not by definition a fiat money, but has similarities: - it is declared by a group of cooperating people to be a form of tender (legally protected only via contract law), - they effectively have no intrinsic value, - nor is it fixed in value to any objective standard It's effectively not that different from currency of the "free money" era in the 1700 through early 1800's, where there were hundreds, if not thousa…

I usually see the term "fiat money" used in the context where people are arguing that a central banks ability to control the money supply is either good or bad. Fiat money in that context is used as the contrast to something like the gold standard. In this current context, bitcoin is more like the gold standard that typical fiat money. The supply of bitcoin can not be manipulated to manage the economy.

The one area that Bitcoin is NOT like fiat currency and like the gold standard is that it is (somewhat) finite.

However, keep in mind that the programmers behind Bitcoin can change their minds and decide to generate more bitcoins. Or they can create offshoot bitcoin currencies that do this.

That's how it's like Fiat money -- there's just people and trust behind it, not shiny rocks in the ground.

What's curious is why some think managing the economy (to a limited degree) is a bad thing.

Re: Adam Smith Hates Bitcoin

#84
post #77
post #31

Earlier quoted context omitted.

Uh, Krugman's whole point is that the capped supply is inherently deflationary so the incentive is to hang on to bitcoins, ie, not the best attribute of a currency.

When did the notion that a currency which loses value over time is ideal become orthodoxy? There are plenty of legitimate arguments that can be constructed against the idea of an inherently inflationary currency too.

"Best to have a stable currency with low inflation" grew out of hundreds of years of observations in the history of human production, prices, and mediums of exchange, and what conditions have traditionally leads to periods of peace and prosperity in a region, and what conditions have led to war, revolt, famine, etc.

In short, empirically, wages and prices are sticky. We assume it has something to do with humans being stubborn, but don't really know why. However, until our imminent replacement by the kind robots, currencies must move if people won't.

Re: Adam Smith Hates Bitcoin

#85
post #8
post #3

Krugman obviously don't know what he is talking about. The resources he is talking about are used to process the transactions between bitcoin owners. The mining is just a side effect. How did a nobel prize winner made a so basic mistake on a topic that has been covered before by him so many times? Bet one Btc that he did that on purpose.

Whatever Kurgman says, it is good to keep in mind that he is an economist turned partisan-politics hack. Whatever he looks at, he looks at it from his lens of ideological reasoning. His ideology clearly aligns with the status quo of economic policy, promoting quantitative easing and keeping up the artificial smokescreen of the superiority of the US dollar. Therefore any competing ideas (e.g. gold, bitcoin) need to be…

Interesting. I didn't realize the IS-LM model (which is the relatively simple lens Krugman uses for 80% of the reasoning on his blog the past 3 or 4 years) was

(a) ideological, (b) partisan, or (c) a smokescreen.

I thought it was used to analyze the relationship between investment, interest rates, and economic production. It's been able to (for example), explain why inflation would be nowhere in sight in the face of government borrowing or quantitative easing given the current state of our economy. Or why any finite currency (gold, bitcoin) would lead to rampant deflation and thus depression conditions.

Can you please elaborate as to why IS-LM the ideological ruse you claim it to be? Krugman may be a hack, but I start to believe the hacks who are continuously right most of the time, and ignore the ones who are often wrong. Just the empiricist in me.

Re: Adam Smith Hates Bitcoin

#86
post #73

Earlier quoted context omitted.

"mainstream media" != "mainstream economists" I'd prefer the opinions of PhD economists with a special emphasis on currency transactions over yours or anyone else's, actually.

Economists who don't agree with Keynes aren't credible because they're not the majority? I prefer science over mob mentality.

Are you serious? Just because you're not Keynesian, it doesn't mean you do not believe in a central bank. Milton Friedman believed in a central bank.

Re: Adam Smith Hates Bitcoin

#87
I think Bitcoin is useful as an experiment in economics and monetary systems.

But the thinking is far from baked and opportunists are jumping on this so quickly that a lot of money is going to be lost, .com-style. Maybe not with Bitcoin, but perhaps with its successor. And a lot more money than the .com bust, because now we're not dealing with just "new economy" utopias, we're dealing with 100+ year ideological disagreements.

Just looking at the comments here, most people seem to have received their economic eduction from political rants and newspaper editorial pages rather than reading (and understanding) a few classics (Keynes, Marx, Minsky, Hayek, Schumpeter, or even Polanyi and Drucker).

This is not to say the profession of economics is noble or even has any real use to the modern world currently, given its problems. But we do have an economic system, and some people do seem to have a better empirical understanding of it than others. And I'm not seeing a lot of empiricism here - lots of emotion, angst, rebelliousness, armchair theorizing, and hope. That's a good way to start something, but it's not a great way for it to finish the way you want. Ask the Marxists.

Re: Adam Smith Hates Bitcoin

#88
post #64

Earlier quoted context omitted.

I hate the term "securing the network". Mining prevents double spends, that's all it does. It doesn't prevent your bitcoins being stolen or make you whole afterwards, it's not analogous to a security guard standing outside a vault, or the government guaranteeing your deposits. I'm mildly optimistic about about crypto currencies in the long term (10 years or more), but energy usage is the weak point of bitcoin, I wrot…

Mining prevents double spends, that's all it does. That is the level of security in the bitcoin network. It might be a design flaw to assume we can act like responsible adults, I agree. But if you're looking for something that makes end-runs completely impossible, I'm afraid you are asking to much and you won't find it in anything that exists.

I'm not commenting on the politics and economics of using public funds to guarantee deposits. I actually agree with the philosophy behind bitcoin, it's clear from the levels of public and private debt that west is gaining a reputation for poor fiscal discipline.

I just think the term is misleading, especially to people who don't know much about bitcoin.

Re: Adam Smith Hates Bitcoin

#89
post #29

Maybe, just maybe, it's not Adam Smith who hates bitcoin like this misleading title suggest, but Krugman. The guy may have a nobel prize, but his strong leftist views seems to be clouding his judgement. Never before in history was there anthing like bitcoin. It's not a commodity like gold - is is pure fiat money, fully based on trust. Hoarding gold or silver or any metal or rare thing was a bad idea because of the al…

> Never before in history was there anthing like bitcoin. It's not a commodity like gold - is is pure fiat money, fully based on trust That's what most currencies are today - symbols fully based on trust. > In fact, by reducing friction, making transaction costs almost negligible, it will help this very thing! What friction are you referring to? > The only real problem is for governments, who won't be able to use the…

Today's currencies are based on government. They are fiat money in that sense, ok.

Bitcoin is "pure fiat" as in "based on trust of the people, by the people". Notice how the government word is absent. I don't think we had that before - at least, not in a way that can not be easily abused by the government.

[there are some counter examples, independant central banks following a monetarist policy of say 4.5% M3 aggregate growth in the EU. The ECB (european central bank), unlike the FED, is almost independent from the government, but still political power managed to create funny mechanism to buy back sovereign debt, which now results in Cyprus style situation. politics and money do not mix well]

The "friction" you ignore is the bid/ask spread and volatility - bad things in any international trade. It's called currency risk and it makes import-export companies take money-market positions for a good reason.

There is also the risk of rampant inflation aka "shoes leather cost" - the best example is when talking about people in the Weimar republic who were paid an always increasing salary twice daily and immediately cashed out all their money because of the crazy inflation. You should like that - so many money changing hands at a high speed must be a good thing for the economy!

Joke aside, your understanding of economics seems very tainted by political correctness, but you correctly noticed I should have added more details, at the risk of creating a contradiction. This is a very valid critic.

The "dead stock" is theoretical - even more with pure fiat money:

- With gold, that could have been a problem, due to storage costs and alternative uses (gold is a very conductive metal, and apparently is also enjoy as jewelry by many people.

- With fiat money, some issues remain, like storage costs, but the risk of inflation is an even bigger issue.

- With a "pure fiat" money, since there are little alternative use, and even better in the case of bitcoin - no risk of inflation, the problem may vanish altogether. People invest just because inflation makes keeping cash a bad idea.

When you reduce the frictions (transaction costs, etc) and remove the risk of inflation, why not convert money to stuff you need "just in time", ie when you need it, instead of wasting time and effort to store it and look for bigger yields due to the frictions and inflation? Presently, you want to do everything you can to avoid losing capital, which creates a game theory problem for other people who have to play the same game you do. But if you remove the problem, you remove the incentives for such behaviours.

Which leads us back to what money is. You can't eat money, or sleep in money. But since you can convert it whenever you need and there can be no inflation, why bother being a rentier when you remove the risk of inflation? In fact, it might be harder to be a rentier, since instead of funding "minimal returns" (ie just a bit more than inflation) investment project of any kind, one would have to aim for "high returns" - as in startups, ambitious companies, etc.

That clarification aside, the core difference with the current system is that by removing inflation, no one will be forced to earn more and more money just to maintain a status-quo (except by your own new needs of new things - we are not hippies, most of us want new shiny things - the economy won't stop).

The removal of this coercion will make useless and redundant all those who currently live on this man-made coercion called inflation.

10% of the GDP is the financial sector - and just how many bright people are employed doing that? That's a lot of freed human capital, which could be put to better use (bring mankind to new planets) once the problem is solved. Bitcoin solved that, and the market is noticing.

If you are not sure about inflation, let me be crystal clear - it was not a bad thing when money had to be a precise unit of accounting matching the growth of the real economy, but with today's computational power (bitcoin can be divided) and networks milliseconds latency, it's not required anymore.

Stock market analogy- instead of printing more shares, companies sometimes divide them, and let the market price each division. It seems to works quite well.

Now with deflation - the great depression was turned into a real problem with the productivity of that time, countries could barely feed themselves. Less people working meant a severe shortage risk. That's not the case anymore, with the amount of agricultural surpluses we have.

I'm not blaming you for your interpretation. Just like you, I believed the lack of inflation was a problem in BTC - or that at least it should happen at a given rate to follow a monetarist approach, or that having so many bitcoins gone to the initial adopters was "unfair" for the newcomers. Now the more I see it, the more I see it as a game changer in a good way. 10% of the GDP spent every year on a problem that is now solved - I'm sorry but even if you give these 10% to those who bootstrapped bitcoin as a one-time payment, this is a steal!

I sincerely believe that in todays economies ONCE THEY USE BTC a similar situation of what in the past were problems caused by inflation or deflation problems will create instead a long period of sustaining growth - by putting human capital to a better use than solving the problems we ourselves created.

How do the keynesians explain this stagflation BTW, not enough stimulus ? Not enough gas being put on the fire ? (or maybe, demand style economics proved to many people the game was rigged and the best move was not to play, since parasitic living was a rewarded option)

You talk full employment, etc, so let's go further with your theory and take an example:

Milton Friedman visited China in the early 1960s and was taken by a government official to see a public works project. Chinese workers were building a canal. Friedman was struck by seeing everyone digging the canal with shovels. Friedman asked the official, "why no heavy earth-moving equipment?" The official said, "oh, this is a jobs program." So Friedman then says to the official, "then why don't you just give them spoons instead of shovels to create even more jobs?"

Here "full employment" maintains the inflation coercion while managing rentiers capital, is tedious and pointless - just like digging with spoons. So what exactly do you like so much about the current system?

Bitcoin is like a big experiment. The current system is adapted to a generous and social human nature with very few asocials. If the human is as good as that, this system as nothing to fear. Why would anyone want any BTC? After all, most would believe and trust the government to manage the money. But if people don't, then bitcoin is the solution.

Re: Adam Smith Hates Bitcoin

#90
post #89

Earlier quoted context omitted.

> Never before in history was there anthing like bitcoin. It's not a commodity like gold - is is pure fiat money, fully based on trust That's what most currencies are today - symbols fully based on trust. > In fact, by reducing friction, making transaction costs almost negligible, it will help this very thing! What friction are you referring to? > The only real problem is for governments, who won't be able to use the…

Today's currencies are based on government. They are fiat money in that sense, ok. Bitcoin is "pure fiat" as in "based on trust of the people, by the people". Notice how the government word is absent. I don't think we had that before - at least, not in a way that can not be easily abused by the government. [there are some counter examples, independant central banks following a monetarist policy of say 4.5% M3 aggrega…

While I haven't completely read through this entire essay I do have a small observation:

I find it fascinating how much distrust for Government and banking systems fuels your passion for Bitcoin. So long as capitalism exists in its current state currency will just be an instrument of capitalism's will. Whether that be Bitcoin, USD or Disney Dollars.

Capitalism is what inspires transaction fees, denying health insurance requests, taking away someones house, poverty, planned obsolescence, etc.

I feel your fire is being pointed at the wrong direction. That maybe your beef is with capitalism and not whether we use semi-anonymous block chains or pieces of green paper.

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