Bitcoin and social theory reflections: A review essay between Amsterdam and Atlanta

The German word Nachklang denotes what resonates after a sound has passed. It is the tune that still plays in one’s head after external sounds have faded. I have been listening to what stays with me in the few days after attending the Bitcoin Europe conference in Amsterdam September 26–28, prior to setting out toward the Crypto-Currency Conference in Atlanta, October 4–5.

Many conferences have a “keynote address.” I think Bitcoin Europe had more of a keynote moment on the final day that reflected the heart of the whole affair. This came when Bitcoin Magazine editor and software developer Mihai Alisie punctuated his moving presentation with, “Bitcoin is here to serve humanity, not to rule it.”

Now that resonates.

Takeaway themes included 1) the need to keep developing more intuitive client software, 2) the desperate need to help improve the global remittance market, which Bitcoin is technically capable of revolutionizing rather quickly, and 3) the need to implement multiple-signature transactions in client software. While that last item may seem obscure, we will return below to its potentially immense long-term implications.

The conference was heavy on entrepreneurs and programmers, often combined into the same persons. Bitcoinj developer and smart contracts enthusiast Mike Hearn could usually be spotted in the lobby talking with someone while looking over a screenful of code on his laptop. Massive effort, energy, and ingenuity is in play, with untold separate projects underway. One person after another I talked to, or who was presenting, was working on some project to develop new wallets, improve existing wallets, develop new exchanges, develop new ways to do exchanging, offer new ways to do remittances and loans, incubate startups, and generally make payments easier and more accessible and secure for wider audiences. That most definitely includes all those underserved, mis-served, or not served at all by the world’s existing constellation of financial institutions.

The tragedy of international remittances

A key concept was that Bitcoin is likely to start meeting needs and expanding most quickly right where existing “points of pain” are most intense. Sure, Bitcoin is better for online payments than credit cards in almost every way, but the epitome of a global point of pain is international remittances.

Immigrants working in wealthier countries trying to send some of their hard-earned wealth back home to relatives in poorer countries face truly dismal options. For every dollar, euro, or yen earned, some portion ends up making its way back home, but conventional remittance services charge shockingly high fees, trimming large percentages off of the fruits of labors undertaken mainly for families elsewhere.

One could call this a scandal, but the scandal is not so much the practices of the visible companies that do manage to provide this service at all, but the Byzantine regulatory mesh behind the scenes that makes it so difficult to do so efficiently. This regulatory overgrowth chokes off this market to the authentically open competition that could lead to lower costs and improved services rather quickly.

Into this fray, Bitcoin technically already enables international remittances with basically no charge for those few (for now) who are able to use it directly at both ends. “Send value anywhere in the world instantly in any amount and essentially for free” is a bold claim. No company can make it, but the decentralized Bitcoin network can and does deliver on it already.

Still, companies still have many roles yet to fill by leveraging the Bitcoin network and connecting people to it in ways they are not yet able to do for themselves. For almost all those who want to do international remittances today, some additional services are required. A remittance provider leveraging Bitcoin in the back office for transfers, while providing cash or local bank integration at one or both ends could offer the same or better service as Western Union’s or MoneyGram’s current offerings at vastly lower fees.

End users need not even necessarily know anything about Bitcoin or realize that it is involved in aspects of international transfers between local offices. They only need recognize that a much higher percentage of their purchasing power actually makes it back home, faster.

To illustrate, Daumantas Dvilinskas, CEO of TransferGo, based in Lithuania, talked about how his company is working to provide faster and less expensive international transfers. He quipped, “It takes three days to send money from the UK to Lithuania. People went to the moon in three days.” I live-tweeted this and Twitter user Jacob Norup Pedersen added, “it takes two weeks from Denmark to Morocco.”

The ecosystem metaphor

In reflecting on the sheer number of business ideas and variations being developed—even just those visible at this conference—I had the image of an exploding Cambrian ecosystem with a large number of candidates for longer-term survival. Many seem promising. In the end, only a few will multiply and advance toward wider adoption. Knowing which ones will be which is an extraordinary challenge. Complicating this further, the “DNA” from one project can easily hop to another in this primordial open-source soup, remixing again and again until successful combinations are found and then built on further. An abundance of candidate code segments and strategies is right there in the open to be borrowed. It is only the process of doing, trying, and offering that will end up delivering the many new conveniences that even today’s skeptics will most likely be taking for granted in daily life in the near future.

BitPay CEO Toni Gallippi, whom I met for the first time on the last day, was on hand representing what a wildly successful Bitcoin business can already look like, having gone from a thousand merchant accounts to 10,000 in the past year. Not coincidentally, his presentation and informal comments off-stage were positive and constructive and showed how his company makes life easier for both merchants and buyers compared to conventional payment options.

This goes right down to the details. Even the Bitcoin to fiat-money exchange rate that pops up when a customer pays a merchant through BitPay is likely to be more favorable than the rate they would get by selling Bitcoin on an exchange for cash. This is due to the company’s use of a custom bid and ask book that integrates live data from across the major exchanges.[1]

Regulation is a much broader social problem

The conference was a microcosm of the true market spirit. On balance, this crowd seemed to view existing regulatory structures—always beloved of industry incumbents as a way to protect themselves against disruptive start-ups at the general expense of consumers—as fairly pointless obstacles, unfavorable environmental features that would-be surviving organisms must simply be able to deal with.

Bitcoin core developer Jeff Garzik, who joined the “Borderless Solutions” panel on the final day, commented that Bitcoin just is a borderless solution by nature. The only need for “borderless solutions” per se, is for particular Bitcoin-related entrepreneurs to try to function amid the various and mixed obstacles left in place by legacy nation-state barriers.

Still, the official presence at the conference went a long way toward confirming an impression I have had for some time. Most governmental officials around the world want to figure out how to perform their various jobs, which mostly consist of applying existing legislation and administrative codes to rapidly evolving market phenomena. They are not generally out to make up additional onerous regulations just for the sake of being troublesome.

There is no need for them to do so. This is because shelves of thick volumes of legislation, administrative code, and case interpretation are already available to guide the obstruction of hapless innovators. Such things already exist and are not being conjured up anew just to harass Bitcoin enthusiasts. Ambiguity about which regulations are to apply in particular cases is also already part of the structural problematic of the legislative law approach itself. Whether this approach is just or helpful to society is a much larger topic (hint: I think it is clearly neither just nor helpful to society). Bitcoin just provides some fresh (and perhaps embarrassing) contrasts with existing systems and practices that work especially poorly.

Wieske Ebben, from the Dutch central bank, joined the panel on regulation. She (being among the approximately 2% of conference attendees who were female) clarified several times that one of the bank’s central concerns in its role as national financial regulator is to make sure new payment systems are trustworthy in the interest of consumers.

Although somewhat at the expense of Ms. Ebben, who seemed a little taken aback, Berlin’s iconic Bitcoin-kiez promoter Jörg Platzer drew a round of applause with a comment made from the seat next to her on the panel. He pointed out that word on the street has it that the public does not now consider central banks and large commercial banks themselves as icons and worthy arbiters of trustworthiness in society.

Yet this understandable focus on assuring trustworthiness is potentially quite a positive sign in light of the reality of Bitcoin (as opposed to the typical media hype). As Toni Gallippi pointed out later, many Bitcoin users believe it is among the most trustworthy and secure payment systems ever devised.

First of all, Bitcoin is immune to certain inherent weaknesses in credit cards that give rise to massive ongoing fraud and identity theft (even after decades of expensive efforts to combat such problems). A Bitcoin payment is pushed by the user, not pulled by the receiver using sensitive information. Receiver-pull methods require the transmission of sensitive financial data, making such data vulnerable to interception or hacking right out of company databases. With Bitcoin, only a cryptographically signed transaction is sent, and, unlike with credit cards, this contains no data that can be used to create additional fraudulent transactions later. With Bitcoin, identity theft cannot be used as a basis for spending other people’s money.

Moreover, Bitcoin cannot be counterfeited, a problem that continues to plague physical cash, despite a centuries-long technical battle between official money printers and counterfeit money printers, a battle that has led up to the most advanced modern papers, inks, plates, and embedded features on one side—and ongoing successful counterfeiting on the other. And as for the real traditionalists, it should be noted that metallic coins and bars, especially gold ones, were ever plagued by reductions and dilutions to weight or purity from both criminals and kings. In contrast, Bitcoin cannot be clipped, sweated, embedded with tungsten, or mixed with just a tad more copper or silver with each new minting.

Niels Ploeger, from the Amsterdam police department, was also on the regulatory panel and attended much of the rest of the conference as well. He explained that he was tasked with researching and better understanding Bitcoin to provide insights that could be useful in informing criminal investigation procedures.

One key point for investigators is that Bitcoin leaves a permanent and unforgeable record of all transactions, with amounts, accounts and time stamps down to the second. This should, in principle, be much more useful and easier to track than cash in the course of specific criminal investigations. Each bitcoin unit has a permanent, public trail behind it. Even if it does go through a mixing service at some point, this fact too can be surmised to some degree, along with the timing of the mixing.

It is true that particular addresses are not directly linked to particular human or organizational identities within the Bitcoin block chain. This is a critical feature, as the presence of such linkages on a public ledger would obviously eliminate the possibility of any user privacy for anyone for any purpose (btw, destroying all privacy is ever the dream of totalitarians).

Still, for those legitimately investigating specific crimes, block chain clues combined with other evidence can lead investigators to insights unavailable from cash. In addition, conventional banking and accounting systems, despite untold piles of regulatory paperwork, should also not simply be assumed to be immune from all manner of forgeries, frauds, and misrepresentations. Comparing one real system against the imagined perfections sometimes tacitly assumed of incumbent systems should be studiously avoided.

A point raised at another time during the conference was that for Bitcoin to succeed in an enterprise context, it will be important for organizations to be able to keep sensitive information private (for example, from competitors) and to make other information publicly verifiable (raising confidence that, for example, reserves or bonding funds are actually present in a specified account). This means that the entire range of user-defined privacy options Bitcoin offers, from 1) high anonymity (possible but somewhat difficult to actually achieve in practice) to 2) pseudonymity (traceable with some specific investigative effort; the most common case) to 3) globally public auditability (for charities or public agencies, for example), are all important, just in different applications.

A quick interlude on privacy, anonymity, and today’s DPR arrest

Just as I was about to finalize this essay, the arrest of Silk Road operator Dread Pirate Roberts was announced. While the complaint seems generally reasonable-looking in terms of the chain of evidence presented, it repeats the usual dubious claim that Bitcoin “was designed to be anonymous.” It was actually designed, which is a matter of public record, to enable people to transact securely, relatively free of fraud or censorship, at any distance, and without the need to rely on (and pay) third parties that may or may not be trustworthy (see Bitcoin: A Peer-to-Peer Electronic Cash System (2008) by Sataoshi Nakamoto).

It should be noted that assessment of the complaint’s merits on its own terms, which must, given its nature as a positive law document, tacitly assume that the existing state of laws is as it should be, must be separated from normative views on the logic or net value of drug criminalization. For example, relevant to such assessment would be evidence that prohibition laws have a dramatic, consistent, and well-documented role in increasing violence in society, including precisely that sort of blackmail and retaliatory violence also alluded to in the complaint, violence that is typical of the operations of any market that is forced underground, such as the gang activity during alcohol prohibition in an earlier phase of US history.

Despite repeating the usual false claim that Bitcoin is inherently anonymous, the complaint then surprisingly goes into several details, each of which contradicts this claim. It discusses the public nature of the block chain and cites detailed sales data obtained from examining specific addresses. It then explains all the additional measures that the site’s operator put into place—beyond simply specifying Bitcoin as a payment method—to try to make the transactions anonymous (which they already would have been to begin with if the misleading claim of inherent anonymity were true). In the event, the arrest was made largely on non-monetary lines of evidence, specifically items such as server trails and linkages among user names.

With all the repeated media-hype that the “main use” of Bitcoin is for illicit purchases (also a highly dubious and factually unsupported claim), it should be interesting to see how much the exchange value of Bitcoin reacts over the coming weeks and months—beyond the obvious short-term panic selling followed by opportunistic buying on the dip—to the shut down of the oft-referenced black marketplace.

To serve and to secure

The overwhelming spirit I sensed at the Bitcoin Europe conference was one of service to those who can benefit from these innovations next. Now that the relevant classes of geeks and early entrepreneurs get it, how can these new possibilities be brought rapidly to everyone else, starting with some of those who could benefit most?

While several speakers reiterated the lingering difficulties of “mom and dad” or “grandma” understanding and using Bitcoin, Willem van Rooyen of SC2BTC, who is working to integrate Bitcoin into eSports (high-skill online gaming matches as spectator entertainment), reported that his target customer demographic has no difficulty at all understanding and starting to use Bitcoin with existing solutions.

Yet the question remains: How can services be made that are easier for more people to benefit from and that will be more resilient and secure with minimal reliance on user savvy?

In this spirit, early entrepreneurs are working, each from slightly different angles, to bring the current and potential benefits of Bitcoin to more and more users around the world. They will do this no matter what obstacles may or may not be placed in their paths, because this is their dream, their vision, their mission, and their rightful role.

Bitcoin as foundation layer for new possibilities

I noticed a strong confluence between my most recent reading and some of the services and technologies featured at the conference. I have been researching and thinking about legal and economic theory and how they relate for some 25 years. It was in this context that I first began to take note of Bitcoin in mid-February of this year. Since then, I have been learning the essentials of the relevant principles in computer science and cryptography as fast as possible in order to make sense of Bitcoin by combining social theory and technical theory in appropriate ways. When it comes to Bitcoin, taking a strongly multi-disciplinary approach is not optional.

Bitcoin was a major breakthrough in the advancement of several much broader sets of ideas. It has created an infrastructure layer that can now greatly facilitate further developments based on those feed-in concepts. These include smart contracts, triple-entry bookkeeping, and additional applications for decentralized unforgeable ledgers such as securely recording titles to other kinds of property.

Michael Goldstein got me started recently going back and reading key works by Nick Szabo that substantially predate Bitcoin, but also contributed greatly to the intellectual milieu out of which it emerged. Michael, along with Daniel Krawisz, will be going into these concepts on October 5 in Atlanta on the “Cryptography and Contracts” panel, and I am greatly looking forward to hearing and discussing more.

As it was, next up in my queue prior to Bitcoin Europe was the seminal article, “Formalizing and Securing Relationships on Public Networks” (1997), which I assigned myself for the relevant flights. At the conference, then, it was striking when several different developers pleaded on stage for more end-user wallet software makers to add support for multi-signature transactions. The convergence is that it is just such transactions, already supported in the Bitcoin protocol, that can make possible not only increased layers of security, but also the next evolutions in smart contracting, including escrow and assurance contracts and the likes of decentralized peer-to-peer loans and verifiable-balance safe-keeping services.

Bitcoin’s functions as information-age payment method and unit of trade may only be the beginning. Deep transformations may also come in the fundamental ways that contracts and agreements come to be implemented, recorded, and performed.

As Szabo showed, the first phases of taking traditional accounting, fiscal controls, and contracting into the digital world mostly just copied traditional paper systems and digitized and networked them. That change had both advantages (speed and accuracy) and disadvantages (privacy and security) compared to the original paper-based systems. However, new technologies could also lead to new methods that were not possible at all on paper, but are enabled for the first time ever by advances in cryptography and related developments.

To get a better image for this distinction, imagine that when powered flight was first developed, pilots had only flown routes right above existing roads. This is better and faster than surface travel, but still not great. It is only when they start to do something that only the new technology allows at all—flying straight from point A to point B, that the more interesting possibilities actually begin to emerge.

Computerized accounting has, in this view, been using the new airplane simply to move much more quickly along above the same old surface routes. In contrast, brand new options built on decentralized financial cryptography, unforgeable hashed transaction chains, triple-entry accounting, and multi-signature and other smart contracting modalities—bigger idea sets that predated and contributed to the invention of Bitcoin—look a lot more like the beginnings of leaving the old surface routes and starting to fly as birds do.

The role of social theorists

It was a pleasure at this conference to finally meet Peter Šurda, a long-time Bitcoin researcher also influenced by the Austrian school approach to economics that began taking its modern forms at the University of Vienna in the 1870s. When I started researching Bitcoin, his was among the first names that began rising toward the top of the discussion forum soup as I began to think about the monetary nature of Bitcoin. He quickly made it into my initial “knows what he is talking about” short-list. Even better, it was a bit of a relief and encouragement to me working in early March to notice that he had independently arrived at some interpretations of the relationship between Bitcoin and traditional monetary classifications that were quite similar to the ones I was initially entertaining.

Peter also told a story about our meeting in his quick post of highlights from the conference. One of my favorite short books on monetary theory is The Ethics of Money Production (2008) by Jörg Guido Hülsmann. When I asked Peter if he had read it, he said, “yes, twice.” I laughed and said that I had also read it twice. What an unusual moment! The global population of people who have done this and attended a Bitcoin conference must still be rather small indeed.[2]

Another time, Peter and I were (half) joking about the proper role of economists in the cryptocurrency revolution. He said the first response of many economists to Bitcoin seems to be denial: Bitcoin is not real and it will fail shortly, just like other hair-brained funny-money schemes throughout history. We have seen plenty of that denial phase, mainly from people who do not seem to have investigated the technology all that much.

My informal empirical generalization is that knowledge of Bitcoin and fascination with or enthusiasm about Bitcoin tend to correlate strongly, as do technical ignorance of the subject and easy categorical dismissal. Notice that we expect matters to be exactly opposite to this when it comes to unsound schemes. In such cases, the more one investigates, the less there is to like, whereas most of the enthusiasts seem to have been swayed by hyped surface appearances, and may even be unwilling to actually look more deeply.

Opposite to denial, the main role of economists, and legal and other social theorists more generally, should be to carefully observe what is happening in the real world and seek to provide systematic theoretical interpretations. It is the entrepreneurs who rule (in service of consumers, who really rule through their buying choices). It is the economists who should be running along either behind or at best next to these real actors and trying to figure out what is happening in a theoretical or more systematic way, adding some insights when and if they can.

This is especially so when an economy is in the midst of an epoch-scale revolution (as in agricultural, industrial, informational). The Spanish late scholastics, observing economic transformations in trade and money, became among the first to start writing insightfully about specifically economic-theory and monetary-theory concepts some 500 years ago. Later, first-hand observers of, and participants in, the industrial revolution—most famously Smith, and more promisingly Say, Turgot, Bastiat, and others—began to make further advances (or sometimes regresses, but still) on top of their observations of new developments.

Economists do have their rightful places. This was evident during the conference, thankfully only a few times, when specialists in other fields edged over into the proper territory of economic theory and the average quality of their causal claims then declined precipitously compared to when they were discussing, say, business, contemporary positive law, or software. This is not a call to leave everything to specialists, but a call for everyone to take steps to advance and improve their own literacy in real economics. As Ludwig von Mises wrote near the end of his landmark Human Action: A Treatise on Economics ([1949] 1998, 875):

Economics cannot remain an esoteric branch of knowledge accessible only to small groups of scholars and specialists. Economics deals with society’s fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen.

Let theorists theorize and doers do

The world is upside-down to the extent that so-called economists occupy positions of administrative power and influence over their fellows to “guide economies,” a euphemism for micromanaging and telling entrepreneurs and consumers what to do and what not to do. The result is the mixed(-up) economy world we inhabit, a world that is perhaps most mixed up of all when it comes to conventional financial systems.

The world becomes reoriented when economists are positioned as observers and theoreticians, helping people understand how it is that the uniquely human capabilities of voluntary social cooperation and mutual service make society possible. Economists can help clarify the puzzle of the world in unique ways. They should observe and bring clarity to what is otherwise a mysterious chaos of real-world progress as it unfolds at the hands of consumers, investors, and entrepreneurs. Economics is supposed to be a science, not a presumptive license to micromanage and direct those who are busy doing the actual work.

For those who do chose to specialize in economics and other aspects of social theory, today offers some amazing opportunities to occupy front-row seats to epoch-scale transformations of the technologies of market exchange. Previous epochal economic revolutions happened over centuries and decades, recognizable mostly only in retrospect. This one appears to be happening over a few years, with increments measured in months, weeks, and even days.

At Bitcoin Europe, the entrepreneurs and developers were the stars. This is the world as it should be. In roles as theorists, a few of us were observing in awe, wonder, and curiosity, following a major social evolution live as it unfolds. In that particular role (playing other roles in addition might double as good research), we operate first from curiosity—to understand for ourselves—and only then to see if we can help make it easier for others to do the same.

Atlanta promises to offer a slightly different mix, still with discussions of entrepreneurship and concrete innovations, but with a little more direct material on economic and contract theory in addition. Some of the original visions that helped give rise to Bitcoin have much more unrealized promise to bring for the benefit of us all.

For all the signs put up in gloomy dismay at the course of the conventional financial world, which effectively say, “the end is near,” we who track promising new innovations need to keep putting up other signs, in different places, that add a counterpoint: “the beginning is here.”

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[1] For a recent theoretical discussion on the respective roles of unit of pricing and medium of payment, see my 14 September 2013 article: “Bitcoin as medium of exchange now and unit of account later: The inverse of Koning’s medieval coins.”

[2] For those interested, my article, “The sound of one Bitcoin: Tangibility, scarcity, and a ‘hard-money’ checklist” (19 March 2013), makes a step-by-step theoretical case as to why a hard-money position is fully compatible with a strange new currency that has no physical existence! If that seems impossibly counter-intuitive, you might understand why I spent about 9,000 words taking an initial shot at doing this. I have made a few refinements since then, not yet published, but the fundamentals remain the same.

The m's and b's of millibitcoin redenomination

We could change where the display shows the decimal point. Same amount of money, just different convention for where the [commas and periods] go…moving the decimal place 3 places would mean if you had 1.00000 before, now it shows it as 1,000.00.

—“Satoshi Nakamoto,” February 10, 2010

In the Kingdom of Geekdom, my €2.60 espresso this morning might have cost 0.0283 BTC (at the 90-day weighted moving average of €92/BTC), perhaps pronounced “point zero two eight three bitcoins.”

Such a string of sounds could only happily emerge from the mouths of card-carrying Geekdom denizens channeling Mr. Spock himself, but it would be most unlikely to pass the lips, or be long tolerated by the ears, of the average Katie, Hans, Taiwo, or Eijiro on the streets of this planet.

And thus a resurgence of interest in changing the standard Bitcoin denomination from a bitcoin (1 BTC) to a millibitcoin (0.001 BTC) has taken shape on the Bitcoin Forum with an informal survey. The top responses to “Should we start using mBTC as the standard denomination?” are 53% for “Yes,” and 20% for “After the price is at $1,000, dollar parity for the mBTC.”

Maybe, but what do we say at checkout?

Designed for convenience at much lower value levels, the initial standard “bitcoin” unit, which equals 100 million satoshis, the more fundamental unit within the Bitcoin system, has grown to become far too valuable for most people’s ordinary way of thinking and speaking about prices. A bitcoin has traded over the past several weeks mainly in the $110–$130 range with the 90-day weighted moving average now just shy of $120. Unlike bitcoin exchange values from earlier years—a few cents and later a few dollars—most ordinary items now have to be bit-priced entirely within the decimal point range, although the luxury houses and cars at Bitpremier could just stay priced in bitcoins. A hypothetical rise to $1,000/BTC would greatly amplify this situation.

A redenomination would only impact the way price numbers are displayed and discussed and would make no fundamental changes to values held. A person with 1 bitcoin could just as well be said instead to have 100 centibitcoins or 1,000 millibitcoins.

In contrast, when political money managers talk of devaluation, redenomination, and most recently “easing,” such machinations actually do signal an active manipulation of purchasing power (always to its detriment). This current discussion simply seeks consensus on practical and linguistic conveniences by, for, and among the wholly self-selected community of participating Bitcoin developers, service providers, merchants, consumers, traders, and even observers.

Yet the difficulties of finding spoken language for naming this new unit, language capable of seeing wide global adoption in everyday use, have proven a lingering challenge. To address this topic, I will draw on conventional pricing usages in several different countries and languages in search of common patterns to use as criteria. I will then apply these criteria to existing proposals for a spoken-language name for the too technical “millibitcoins,” and then offer two suggestions, the second of which I have not yet seen proposed elsewhere.

Before moving on, let us be sure to put this whole “problem” in perspective. This is a “sound-currency problem,” in the sense of the “first-world problems” meme. A rising currency and falling prices of goods and services denominated in it are the kinds of “problems” most people ought to be happy to face. The long, sad history of declining political currency values has systematically punished savers and planners and rewarded debtors and those with less effective foresight, leading to shortening time horizons and eroding senses of personal responsibility.

Falling currency values leave families struggling to meet ever-rising prices for goods and services. By several estimates, the United States dollar, for example, has lost some 97%–98% of its value since its “management” was assigned to the Federal Reserve System in 1913 (I refer those who fear falling prices, the deflation-phobic, to my 29 March 2013, A short Bitcoin commentary on “Deflation and Liberty” and the works linked from it).

Speaking of prices

Since the Bitcoin network spans this entire planet, such linguistic research ought to begin by at least attempting to reference practices in several countries and major languages. I will select examples below from the US, Germany, and Japan, based simply on my own degree of direct familiarity with each (please add other instructive usage examples in the comments). The three numerical examples below are of roughly similar purchasing power in each zone, probably enough to buy another espresso.

The first thing I notice is that it is common to use two decimal places, “cents” after a main unit. Second, in shopping language, the unit names are often omitted altogether. Thus, in the US, a spoken “two-sixty” means two dollars and sixty cents ($2.60). In Germany, “zweisechzig” likewise means two euros and sixty cents (€2.60), or more formally “zwei euro sechzig” (but still most often omitting “zent”). Omitting the unit is facilitated in both cases in the same way: two individual numbers are spoken in sequence, the first specifying the whole unit; the second, hundredths of it.

In Japanese, ¥260 is “nihyaku rokujuu-en”. Here, there is no decimal point, but in effect “hyakuen” (¥100) takes the place of the base unit in the dollar and euro examples. The “yen” (actually pronounced “en”) is not omitted in speech, but it only takes a quick syllable to say it and units are not optional in general. The “hyaku,” also lightning fast to say in Japanese, already works to create a division in ¥260 between the two hundreds and the sixty. This makes it less functionally different from the English and German examples than it might at first appear.

Generally speaking, when the names of currency units are not contextually omitted in speech altogether, they can almost always be pronounced in just two syllables: dollars, euros, pesos, kronas, rubles, rupees…bitcoins. In contrast, “millibitcoin” or “mBTC” (pronouncing each letter) each take up a hefty four syllables and are as such unlikely to survive in non-technical spoken usage.

The bit is dead; long live the bit?

So, what might that unit be called in ordinary speech? Some commentators have identified a problem with “coin.” It is by nature indivisible. On the other hand, “the coin of the realm” does give a more uncountable sense of a money in use in a particular place.

Either way, this provides an easy opportunity to cut out a syllable, and with “coin” duly exiled, proposals for spoken options for millibitcoin have included “millibits,” “embits,” “mills,” “mill,” “millies,” and “bits.” Those thinking way ahead have already termed a microbitcoin (0.000001) a “Mike,” presumably the thin, but loving partner of the much heftier Millie.

“Millibits” came out ahead in an informal naming poll for millibitcoin way back on May 14, 2011. Unfortunately, at three syllables, it is still a mouthful for everyday speech, exceeding the conventional two syllable mainstream for currency unit names.

You want change? Anybody got some tools?

“Bits,” at just one syllable, already have a long and storied history in coinage. For centuries, the Spanish silver dollar was a preferred unit of global trade due to its relative freedom from debasement of silver content and its wide international adoption. The peso de a ocho coin was worth eight reales and became known as “pieces of eight” in English, giving pirate parrots something to prattle on about. It has also been said that certain coins were physically cut into eight pieces or “bits” as a way to improvise around small-change shortages using the resulting sharp metallic pie pieces. I am not sure of the ratio of fiction to fact on that one.

The resulting related use of “two bits” to mean a quarter dollar has only recently been fading out of informal use in the US after a long run. Unfortunately, fiat inflation eventually left a quarter dollar unable to buy much of anything and the meaning of “two-bit” declined with it, coming to characterize something of poor quality. A “two-bit coffee” might thus sound rather dilute to modern ears.

Could “bit” be brought back in a decimal-based, high-tech reincarnation? A millibitcoin (0.001 BTC) is now trading at about US $0.13. Twenty of these might buy that espresso at $2.60 and “twenty millibitcoins” (20 mBTC; 0.020 BTC) might be shortened in speech to “twenty bits.”

The centibit challenge and foodie what-ifs

If such bits stood for centibitcoins (0.01 BTC) instead of millibitcoins (0.001 BTC), that espresso might cost about “two bits” after all (assuming $130/BTC). With centibitcoins, a family sushi dinner that might add up to $65.95 would come to “fifty (bits) seventy-three,” or the waiter could say, “in Bitcoin, that’s fifty seventy-three.” That’s 50.73 centibitcoins versus 507.3 millibitcoins and 0.5073 bitcoins.

A centibitcoin redenomination could thus bring things into a familiar range for dollar and euro users right away. At around $130/BTC, a centibitcoin would trade for $1.30, €1.00, and ¥100. That seems intuitively perfect, but only under approximately current rates.

Bitcoin exchange values could stay level or fall. Expecting a long, level trend or modest decline would speak in favor of centibitcoins as the standard unit. If Bitcoin does continue to climb impressively, though, how long before its dollar exchange value adds another digit?

Let us say that the bulls have it and the exchange value of a bitcoin moves to $500 and then $1,000 over the next several years. How would these two alternative redenominations then play out with some everyday examples?

At $500 per bitcoin, a $2.60 espresso would cost 0.0052 bitcoins, 0.52 centibitcoins, and 5.20 millibitcoins. Millibitcoins would win according to the balance of the above criteria (“in Bitcoin, that’ll be five twenty”). The big sushi dinner would be 0.1319 bitcoins, 13.19 centibitcoins, and 131.90 millibitcoins. In this case, either one might look okay.

At $1,000 per bitcoin, the espresso would cost 0.0026 bitcoins, 0.26 centibitcoins, and 2.60 millibitcoins. Millie would win. The sushi would then come to 0.06595 bitcoins, 6.595 centibitcoins, and 65.95 millibitcoins, and millie would win again.

While a centibitcoin transition would make sense for now, an assumption of further exchange value growth would point in favor of the proposed millibitcoin unit. Either way, a redenomination could well be positive. A key challenge for Bitcoin entrepreneurs is helping to broaden adoption into more frequent everyday payments and purchases. Making Bitcoin units easier for contemporary people to talk about in everyday language and think about closer to everyday price numbers could well be helpful.

So how about just putting “m” and “B” together?

“Embies” (mB) is another option I have proposed based on pronouncing “m” and “b”. The B can also be written with the proposed Bitcoin currency symbol when it makes its way into standard character sets. Embie matches the conventional two-syllable criteria. It strikes me as easy to pronounce on a multilingual basis. It also seems friendly and familiar; it could be a pet’s name. I find it easier to say than the two-syllable “embits” candidate. Not all sets of two syllables are equally easy to pronounce.

Still, some people seem to hate it, while others like it. It may be that the name for BTC 0.001 that will prevail in the end has not yet been coined.

For additional articles on this topic, visit my Bitcoin Theory page on this site.

 

Another bump on the road: Bitcoin and bubbles revisited

Japanese “bumpy road” sign for MtGox. 路面凹凸ありOverload, delays, and the temporary closure of the MtGox exchange seem to have been proximate triggers for a sharp Bitcoin correction on April 10–12 from dizzy highs.

As trading graphs fell freely, some Bitcoin critics appeared gleeful to believe that their prophecies of the Bitcoin phenomenon being nothing more than a delusional bubble might be coming true. Commenters promptly took to the internet to gloat at the short-term losses of naïve traders and bask in their own contrasting wisdom.

In this new context of short-term sentiment, it may be useful to revisit and refine my recent critique of the dismissal of Bitcoin as being nothing more than a bubble or even a sort of Ponzi scheme. In Hyper-monetization: Questioning the “Bitcoin bubble” bubble (6 April 2013), I offered an alternative to the popular interpretation of the long-term rise of Bitcoin’s exchange value relative to fiat money. This was especially intended to address the view that Bitcoin is nothing more than a bubble. The most insistent proponents of this view elaborate along these lines: “Bitcoin has no ‘intrinsic value’ and is therefore ultimately destined to fall to its ‘inherent’ value, which is zero, completely wiping out any true believers still left around for its inevitable and welcome extinction from the universe.” Or something like that.

“Is” versus “in”

A more subtle approach to calling a “Bitcoin bubble” is also available, and has long been advanced by several people with more nuanced understandings of the system. First, Gavin Andresen, lead developer of the open-source Bitcoin Project, wrote nearly three years ago in a short post Bubble and crashes (9 July 2010) that he expected multiple recurring bubbles over the course of several years.

Bitcoin will get mentioned someplace with lots of readers, a bunch of those readers will like the idea and try to buy Bitcoins, their price will rise, which will draw even more people to “invest”, which will drive the price up even more…until people decide that the price isn’t going to rise any more and everybody rushes to sell before the price drops. I predict there will be between one and five Bitcoin bubbles (price will double or more and then crash back down below the starting price) in the next four years…I think it will be impossible to tell if a bubble & crash is “natural” or “the men in black helicopters” manipulating the system.

Second, Rick Falkvinge, who had also called a short-term bubble and a correction to $60–$65, has long identified currency exchange services as a weak link in the wider Bitcoin “ecosystem.” See his 12 April post What we learn from this Bitcoin correction. A commenter on that post wrote, “I would not call an 80% move a correction…” to which Falkvinge replied, “It is not the downslope that is abnormal, it is the upslope. A value that reverts to where it was two weeks ago is normally a mild correction.”

Finally, Peter Šurda who steadily focuses on the importance of liquidity, infrastructure development, and scaling over price, re-summarized in a 12 April Facebook comment that:

My empirical research shows a correlation between media frenzy and price, and between liquidity and price volatility, while my theoretical research concludes that the price will fluctuate more rapidly than with more liquid media of exchange (i.e. what we are accustomed to as money, or even highly liquid goods such as stocks or commodities). The fluctuations will continue until Bitcoin’s liquidity increases significantly.

Such approaches have essentially been warning that, “Bitcoin may well be in a bubble phase,” adding, “one of several large ones, just as we expected to occur along the way.” As a commentary on the price trend in late March and early April, this appears to have been a valuable assessment. These observers recognized in advance that the price seemed to be rising at a pace unlikely to be sustainable, driven perhaps by events in Cyprus and then a flood of popular media attention.

In sum, saying that “Bitcoin is a bubble” (total dismissal of the system as such) and that “Bitcoin is (or was) in a bubble phase,” are quite different claims. Now that another correction has arrived, this distinction can come into better focus.

The Bitcoin system is not the same as the peripheral trading services

The core of the Bitcoin system itself, which few people seem to grasp is something entirely different from the more visible currency exchanges and their price charts, seem to have been relatively untroubled. This includes nodes, mining pools, the blockchain, wallets, and even informal and P2P markets. Besides MtGox, with its 12-hour mini-holiday, from what I noticed, only some of the exchanges and data chart services were heavily challenged and went offline intermittently. Bitcoincharts, for example, reported a 25x spike in concurrent online users from 2,000 to 50,000, requiring “tweaking the backend” systems in response.

The primary proximate cause of the crash, then, seems to have been the inability of a (currently) key exchange service provider to keep up with demand fed by sudden media attention and buy-in frenzy in the run-up, triggering a classic emotional wave of panic selling, most likely the corollary of the previous heat of emotional buying. The existing trading infrastructure (which is not the same as the Bitcoin system infrastructure) was not ready to scale to such a rapid demand spike. This sharp correction might be viewed in part as the rather ungentle method by which the market realigned itself with the current real-world state of scaling capabilities and business planning skills at exchanges that have been working to build themselves from the ground up.

Creation versus destruction

In the case of a classical terminal hyperinflationary event, the authorities orchestrating it are better equipped and prepared. Ink and paper are ready. Printing presses run and are up to their tasks. More importantly, printing plate engravers are standing ready to carve additional integers, a relatively simple task of creating higher and higher denominations of notes. The technical infrastructure is in place for state money monopolists to completely destroy the value of a paper currency, using “zeroes” to drive it all the way to “zero” and extinction.

Building a new kind of media of exchange for a community of all-volunteer users from scratch through peaceful cooperation, entrepreneurship, coordination, debate, and market ecosystem building would appear considerably more challenging than destroying a paper currency. After all, being constructive often seems more challenging than being destructive; it requires greater ingenuity and long-term persistence and perspective.

For additional articles on this topic, visit my Bitcoin Theory page on this site.

 

Short-term Bitcoin exchange trends as Rorschach tests of economic views

What might Hermann Rorscach (8 November 1884 – 1 April 1922) see in all this?Whatever the current excitement on any given day about short-term Bitcoin price charts, what stands out for me as a watcher of the theoretical underpinnings of discourse on these events is how they bring various economic-theory concepts out into view as the people who have them in mind use them to interpret current events. As Keynes famously put it: “even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist.”

I try to stay at least 98% positive in general; critique can be more tempting than contribution. That said, sometimes understanding can be advanced by considering contrasting examples. Here are three.

Realized/unrealized gains/losses

First, it appears that the distinction between realized and unrealized gains and losses could be kept more firmly in mind by most. The take-home point is that for all those Bitcoin market participants (whether bull or bear) who did not actually trade today or recently, nothing much actually happened during the rapid headline price changes on the exchanges (of course, the changes might lead some to adjust their future plans according to their various forward-looking judgments). What these exchange prices actually indicate is merely the current record of transactions that are occurring on those exchanges. It is only the collection of such discrete “real time” recorded exchange events that provide the data for the construction of the lines on the trend graphs.

At times of temporary disruption of access to websites, low visibility prevails. Pre-placed automated orders execute and panicking short-termers flee. The price graphs (as they become accessible after the disruption) show the actual trades and volumes at particular times during this course of events. The price graph on a given exchange indicates actual marginal activity, at given moments, on that exchange. These exchange services are specific businesses; not magical, instant oracles of “price” in general or “value” in general. In the event, the top two exchanges, it appears from preliminary reports, were most likely under active manipulation in a possibly partly orchestrated move (and do not forget that this may well have included both upward and downward elements).

What a difference a few days can make.

A spiral into absurdity

Second, the good old “deflationary spiral” fallacy (maybe market observers will get a couple days off from hearing that one now?) apparently misses the significance of the fact that BOTH a buyer and a seller are required to form any given data input for market price graphs. With no transactions occurring, which is what is posited in this imaginary world of “no one will sell when it is so valuable,” there is no “price” at all. Thus, the market “price” could not be too high, because it would be non-existent under the stated assumption that no transactions were occurring. Reductio ad absurdum. These exchange prices form an up-to-date historical record at a given time of actual recent buying and selling on a given exchange.

Look for the verb

Finally, it has been a little surprising just how many Bitcoin critics employ the concept of “intrinsic value” in making the claim that Bitcoin does not have any. It was members of the Austrian school of economics, with the so-called subjectivist marginal revolution, that had seemingly put the final nail in the coffin of this ancient economic fallacy. Beginning in the 1870s, Austrian school scholars began to re-emphasize the view that value is ultimately the result of valuation, in reference to the verb to value, which is an act that can only be performed by living people (We now understand that some of the Late Scholastics of Salamanca also had this point reasonably clear several centuries earlier). After Carl Menger, this view gained steam with Eugen Böhm-Bawerk and unmistakable clarity with Ludwig von Mises’s 1912 Theory of Money and Credit and later works. This further application of the subjective theory of value clarified that the concept of “intrinsic value” is ultimately incoherent, not only with regard to goods in general, but to media of exchange as well. Mises was rather strict on this point in TMC, pp. 61–62:

Our terminology should [help to overcome] the naive and confused popular conception of value that sees in the precious metals something “intrinsically” valuable and in paper credit money something necessarily anomalous. Scientifically, this terminology is perfectly useless and a source of endless misunderstanding and misrepresentation.

Note: I discuss value theory in simple terms with illustrative examples in Resolving the paradox of value. For a more detailed discussion, see IN-DEPTH | The sound of one bitcoin: Tangibility, scarcity, and a “hard-money” checklist.

For additional articles on this topic, visit my Bitcoin Theory page on this site.

 

Hyper-monetization: Questioning the "Bitcoin bubble" bubble

What is the opposite of this? Sweeping up in 1946 after the hyperinflation of the Hungarian pengő. Source: Wikimedia Commons, Magyar Nemzeti Múzeum Történeti Fényképtára, Budapest.

Many observers have likened the rise of Bitcoin to an asset bubble. It is so customary today to use the “bubble” word in articles about Bitcoin that there may in fact be a sort of “bubble” bubble.

Another less common word introduced in this context is hyper-deflation. Some say such a thing is horrible, others that it is great. I suggest a quite different possible interpretation of these events and a word to label them: hyper-monetization.

I first heard the term “hyper-deflation” (used in a positive sense) when Bitcoin was rising rapidly from the low thirties to the high thirties over a few days in early March (Yes, this was only a month ago). While a few specialists of a certain persuasion understand “deflation” to be a great thing for ordinary people (see, for example, my 30 March 2013 post, “A short Bitcoin commentary on Deflation and Liberty”), the word still has a public-relations problem. Along with some technical issues from its several possible definitions (price level changes versus quantity of money changes, for example), and negative interpretations in conventional economics circles, it just sounds depressing, regardless of the stated technical sense in which one attempts to use it.

The word “hyper-monetization” first occurred to me around that time as a more positive term, and perhaps a more accurate antonym for the catastrophic hyperinflations that have repeatedly killed off fiat paper monies throughout their history. A related term, “de-monetization,” denotes the process of a widely used medium of exchange ceasing to function as such.

A total hyperinflationary collapse is one way de-monetization can happen. Another type of historical example of de-monetization is “bimetallist” legal tender price-fixing schemes driving one precious metal, say silver, out of circulation in favor of another metal, say gold. Yet another historical example is when a pure fiat paper standard is created after monetary authorities permanently “suspend redemption” of their legal tender notes into the precious metals they had promised to deliver.

The opposite process of “monetization” denotes something that was not a money beginning to function as one. When euros took over the respective jobs of various European national currencies, euros monetized and the previous national currencies de-monetized. Now they are historical paper relics, but no longer function as monies.

In contrast to such a legal tender conversion/transition, however, something that gains exchange value from scratch on the open market (rather than taking up exchange value through a conversion)—and does so at a logarithmic pace—might then reasonably be described as being in a process of “hyper-monetization.”

The trouble with the “bubble” bubble

Bitcoin’s high historical and current price volatility is unquestioned. However, one problem with the “bubble” analysis is that in an asset bubble, certain fundamental matters are quite different. In a business cycle mania phase, prices of the most popular asset classes for that particular cycle are bid up as people pile their freshly printed fiat money and freshly produced fiat bank account digits into booming fields. Each party in this rush competes with all the others to acquire some of the bubbling assets. These people are misled by artificially low interest rates to bid up certain asset prices unsustainably, and this all eventually collapses, as described in Austrian business cycle theory.

However high the prices of bubble assets go, they do remain the same goods. In the case of a monetization event, though, the practical use-value of the trading unit (not only its price in terms of other goods or monies) actually does rise with the number of people using it and the depth of the market. To imagine how different this is from a classic asset bubble, it would be as if not only the price of bubble-era houses were rising, but also that their actual sought-after qualities as houses were improving spontaneously at the same time. Such houses might sprout new rooms with no one building them, with new paint jobs appearing mysteriously overnight without any painters having visited.

In this way, quite unlike the case of an asset bubble, the more people “pile into” a medium of exchange, the more valuable it actually is in its function as a medium of exchange from the point of view of its users. This is a separate matter from its price, as a few astute observers out there have so far already been noting.

This type of value has been likened to the use-value of a language rising the more people there are who can speak it. Another analogy would be to the use-value, from the point of view of each user, of a given social networking site rising the more people join it and the more they use it.

These are called network effects. In this case, the exchange value of the unit for each holder is directly related to each holder’s expectations of being able to use the unit in future exchanges (much like the value of knowing a language relates to one’s expectation of being able to communicate with it). This is in turn related to how many people accept the unit, how readily, and for what. It is important here to note, due to long-standing and common economic misconceptions, that the “future” in this sense is any future time—from five seconds from now to however many vaguely numbered years into the future a particular acting person might happen to have in mind.

When it comes to network-effect growth, the more the merrier. An analogy can be made not only to the rising stock price of a growing social networking site, but also, and more importantly, to the number of users of that site and how much it is used.

Check this box for a perspective shift

Yesterday, I saw a tweet from the insightful Bitcoin watcher Jonathan Waller. He wrote (enthusiastically, I think) that, “The bitcoin all-time chart is not even slightly sensible,” and linked to a chart [showing logorithmic growth shown on a linear scale].

This tweet got me thinking (yes, this is also a possible function of tweets). How can we make sense of this trend? Might taking some other perspective help?

This chart struck me as looking quite similar to a hyperinflation. However, instead of the exchange value of a trading unit plummeting toward the abyss as in an archetypal fiat paper-money collapse, Bitcoin has been doing the opposite.

Checking the log-scale box on the bitcoin price chart reveals a different picture. It shows a (so far) intuitively ascertainable long-term historical course with a large bump or two and some curves in the road. In this longer-term view, the exchange rate has been growing, not so much from one to two to three to four, as on a linear scale, but from 0.1 to 1 to 10 to 100. It has grown by several orders of magnitude during these couple of years.

Of course, the usual caveats must be quickly noted. “If present trends continue” can and often is infamously followed by them not doing so. But what might nevertheless be observed about this trend?

If one were somehow witnessing a phase in the first “hyper-monetization” in history, is this not more or less what one would expect to see?

Mark my words

The value of a paper money at the tail end of a hyperinflationary event is mainly the direct value of the physical paper (burning, wall-paper, etc.), but there is a more gradual build-up before the final collapse. The following chart is the price of Goldmarks in terms of Papiermarks from 1918–1923 in the Weimar Republic. This includes a steady logarithmic trend from 1918 to mid-1922. The exchange rate also moves from roughly 1 to 100 during those few years.

After that, however, the 1923 portion looks incomprehensible even on a log scale. As monetary authorities run the presses full speed and add new zeroes to denominations, a point is reached toward the end when the primary objective of market participants is to rid themselves of paper as quickly as possible before the last shred of exchange value evaporates.

The USD/BTC trend shows the price of Bitcoin against (also steadily depreciating) US dollars. This bears a certain similarity to the pre-1923 phases of the Weimar Papiermark/Goldmark chart. One difference is that the trend for Bitcoin from autumn-2010 to spring 2013 is the inverse of the trend for the ill-fated Papiermark from 1918 to mid-1922. In other words, for the years in question, the rise of Bitcoin’s relative exchange value shows a statistical pattern with similarities to the decline of the exchange value of the paper mark. Of course, the specific factors behind these events are quite different. In one case, the destruction was driven by ever increasing, arbitrary production of more units. In the other, the growth appears to be driven by voluntary adoption (with all its various motivations) and network effects.

If we were now actually witnessing early stages of an unprecedented hyper-monetization event, what might the top of such an event look like eventually? This is a fantastic and entirely speculative question and certainly invites the ever risky “if present trends continue” types of thinking. Looking toward the future should never be confused with looking into the past.

That said, during such a singularity-like event, were such a thing to be occurring, one might at some fairly early stage expect to see an Epic Rap Battles of History installment called, “Bitcoin vs. Fiat Money.” The key question would then soon become:

“Who won? You decide.”

For additional articles on this topic, visit my Bitcoin Theory page on this site.

[UPDATE: Seven months later, a new article including revised highlights of this article along with new material appeared: Hyper-monetization reloaded: Another round of bubble talk (7 November 2013).]

A short Bitcoin commentary on "Deflation and Liberty"

I just finished reading the monograph Deflation and Liberty (published 2008, but originally produced more than five years earlier) by Jörg Guido Hülsmann. I am a big fan of Hülsmann’s 2008 work The Ethics of Money Production (not to mention just about everything else he has written). However, I had understood the shorter work to have been a mere precursor to The Ethics of Money Production. Now that I have finally read it, though, my impression is that it is quite different in content and certainly warrants its own reading. Besides, I had to catch up with the indefatigable Mises Circle at UT group, which read and discussed Deflation and Liberty a few weeks ago.

Deflation and Liberty was written years before Bitcoin appeared, and even more years before Bitcoin began to rise to superstar status in recent weeks. My collection of quotations below read in a different light now that Bitcoin has risen as a “third way” in the exchange space.

Bitcoin is not technically deflationary under one definition because its supply is set to grow gradually up to a terminal limit (inflation and deflation in this sense refer to quantity of units rather than relative exchange value). The important point is that the Bitcoin supply is set to grow at a specific, pre-defined, and gradually declining rate that no particular person or group can manipulate. Its growth rate is fundamentally knowable and predictable by all market participants, and presumably less variable than even the total market supply of a given precious metal in any given year.

After the Bitcoin supply growth trend ends in about 2140, I understand new production ceases and its supply is to remain stable and then decline ever so slightly based on incidental micro events such as individual password misplacements. I therefore believe it is even now “deflationary,” not in the letter, but in much of the spirit in which Hülsmann used the term in this monograph. At any rate, it provides a diametric contrast with the familiar inflationary policies that take the form of arbitrary fiat increases in the money supply conducted for special-interest political ends.

In another sense of the word deflation, however, Bitcoin does qualify, for the moment at least. The general exchange rates of Bitcoin against all other goods and services will of course tend to decline so long as Bitcoin is gaining in exchange value; Bitcoin-denominated prices will tend to fall so long as its exchange value grows.

With this context in mind, let us see how Bitcoin stacks up in light of the following quotations, keeping in mind that no such thing as Bitcoin existed at the time this monograph was written. I will add some minimal commentary in brackets with emphasis in bold.

Selected quotations from Deflation and Liberty with commentary

p. 16 fn 8: Speaking of “an economy” we mean the group of persons using the same money.

[Bitcoin, though not yet technically a “money” by many definitions, is not geographically defined, but rather defined by the community of its actual users and producers on a global basis. Use and production is entirely voluntary and entry open. To join this community, one need merely aquire a free “wallet.”]

p. 30: In a truly free society, the production of money is a matter of private initiative. Money is produced and sold just as any other commodity or service. And this means in particular that in a free society the production of money is competitive. It is a matter of mining precious metals and of minting coins [and of mining Bitcoins], and both mining and minting are subject to the competition emanating from all other market participants.

[Bitcoin “miners” cobble together or buy their “rigs,” connect to the network, and set work in motion, all of their own volition.]

p. 31: The production of money in a free society is a matter of free association. Everybody from the miners to the owners of the mines, to the minters, and up to the customers who buy the minted coins, all of them benefit from the production of money. None of them violates the property rights of anybody else, because everybody is free to enter the mining and minting business, and nobody is obliged to buy the product.

[Bitcoin mining, exchanges, wallet services, users, etc. would all appear to qualify under this criterion of free association. No one is obliged to buy Bitcoins. Indeed, in perfect contrast, many people are currently scrambling to figure out how to acquire them.]

No game.p. 32: The producer of fiat money (in our days typically: paper money) sells a product that cannot withstand the competition of free-market monies such as gold and silver coins, and which the market participants only use because the use of all other monies is severely restricted or even outlawed. The most eloquent illustration of this fact is that paper money in all countries has been protected through legal tender laws. Paper money is inherently fiat money; it cannot thrive but when it is imposed by the state.

[Bitcoin is by no means imposed by the state. In diametric contrast, all that can be said of it on this count is that a few state agents are slowly starting to ascertain (and only roughly) what it is several years after its launch]

p. 35: It would not be uncharitable to characterize inflation as a large-scale rip-off, in favor of the politically well-connected few, and to the detriment of the politically destitute masses. [Fiat inflation] always goes in hand with the concentration of political power in the hands of those who are privileged to own a banking license and of those who control the production of the monopoly paper money. It promotes endless debts, puts society at the mercy of “monetary authorities” such as central banks, and to that extent entails moral corruption of society.

p. 39: That leaves barter as the only legal alternative to using paper money, and barter is so much less beneficial than monetary exchange that market participants typically prefer using even very inflationary monies rather than turning to barter.

[Bitcoin has now landed out of the cyber ether as a sort of “third alternative” to this scenario]

The considerable social advantages of deflation

p. 40: Deflation…abolishes the advantage that inflation-based debt finance enjoys, at the margin, over savings-based equity finance. And it therefore decentralizes financial decision-making and makes banks, firms, and individuals more prudent and self-reliant than they would have been under inflation. Most importantly, deflation eradicates the re-channeling of incomes that result from the monopoly privileges of central banks. It thus destroys the economic basis of the false elites and obliges them to become true elites rather quickly, or abdicate and make way for new entrepreneurs and other social leaders.

p. 41: Deflation is at least potentially a great liberating force. It not only brings the inflated monetary system back to rock bottom, it brings the entire society back in touch with the real world, because it destroys the economic basis of the social engineers, spin doctors, and brain washers.

p. 43: The dangers of deflation are chimerical, but its charms are very real. There is absolutely no reason to be concerned about the economic effects of deflation—unless one equates the welfare of the nation with the welfare of its false elites.

[In conclusion], pp. 43–44: The purpose of these pages is not to appeal to the reason of our monetary authorities. There is absolutely no hope that the Federal Reserve or any other fiat money producer of the world will change their policies any time soon. But it is time that the friends of liberty change their minds on the crucial issue of deflation. False thinking on this point has given our governments undue leeway, of which they have made ample and bad use. Ultimately, we need to take control over the money supply out of the hands of our governments and make the production of money again subject to the principle of free association. The first step to endorsing and promoting this strategy is to realize that governments do not—indeed cannot—fulfill any positive role whatever through the control of our money.

For additional articles on this topic, visit my Bitcoin Theory page on this site.

 

Is the left–right spectrum in flatland? A better way to graph Ron Paul

The rising prominence of the Ron Paul campaign is straining the interpretive power of the conventional left–right political spectrum. The San Francisco Chronicle recently took a stab at placing Paul somewhere along it (Is Ron Paul left of Obama, or a throwback to Ike?). In an online discussion spurred by an Economist article about the political spectrum and libertarian ideas (The problems of purity), I commented that, "The scale itself, left, right, and middle, is entirely within flatland." This stirred some puzzlement. 

What if there is a way to graph the core positions of the Paul campaign that goes beyond trying to squeeze them into the usual left–right spectrum? Could the spectrum itself be analogous to the imagined world in the classic 1884 novel Flatland? What if at least one whole dimension is missing from conventional discourse?

In the novel, two-dimensional beings live within a geometric plane. They are awed by a three-dimensional being who seems to appear one day out of thin air, change shapes, and then vanish from their midst. How might we locate an additional dimension in the political spectrum when it seems as though the whole range of opinion must exist only along one line? Such a line does not even allow us the Flatlanders' relatively generous two dimensions.

So let us imagine a second scale that crosses over the modern left–right scale from front to back. The whole left–right scale could then move as a band along this second scale over time. I will label this new scale with percentages as an expedient to illustrate relative positions and directions of movement.

Let us say that all the way at 95%–100% in the "back" of this scale is totalitarianism, the idea that the state can do to/with citizens and non-citizens whatever "it" pleases. Notice how the historical "far right" fascists and "far left" communists had different flavors of totalitarianism in common. They had different areas of emphasis, but agreed that the state/party was supreme over any individual or traditional community interest. For simplicity, say that Hitler, Stalin, and Mao were all standing side-by-side way out there around 95%–100% on our imagined front–back scale. When viewed along this dimension, their differences were incidental, their commonalities overwhelming.

Now let us say that all the way in the "front" of the same scale at 0%–5% is (philosophical) anarchism, the idea that the state as such (depending on exactly what is meant by "state") has no properly justifiable place within civilized human societies. Interestingly, there are also distinct "left" and "right" versions of this body of thought, though fewer people are familiar with those distinctions.

This raises a puzzle. If the left–right scale can join seemingly opposite left totalitarians and left anarchists together all the way down at one end and seemingly opposite right totalitarians and right anarchists all the way down at the other, it would seem to suggest that something about that scale is a little odd. It seems to lack some...dimensions. A naive observer might be forgiven for assuming that the two sets of anarchists and the two sets of totalitarians, despite being on opposite ends of the left–right scale, might be at least as likely to find common ground with their opposite numbers as with their supposed neighbors in debating how either their imagined ideal total states or totally statefree societies, respectively, ought to look.

If we view the sweep of US history starting from the revolutionary period, many of the various 1770s American revolutionaries were probably around 0–10% on this front–back scale, depending on which ones you talked to. They were rebelling against perceived overreaches of monarchy and mercantilism (at 30%?) and wanted to replace them with somewhere between nothing and as little as possible, or with a novel "limited" state organization that was supposed to differ significantly from monarchy. Yet there were also some 25%-ers among the Hamiltonian Federalists, and indeed, many Jeffersonians already viewed the Constitution of 1787 as a dangerous step in the direction of unlimited government, which clashed with the original revolutionary ideals of 1776.

As US history has progressed since then, there has been cyclical zig-zagging between "left" and "right," but there has also been a pervasive undercurrent in which left, right, and center all move "back" in the direction of a more powerful central state in all areas. The modern US Federal government's effective powers vastly exceed those that most monarchs would have even dared dream of. Modern powers to tax, inflate, and borrow are immense, the US presidency has steadily amassed new and expanded powers, and myridad aspects of life and business are hyper-regulated. The whole left–right scale has been moving along the front–back scale toward the back for a long time.

Where is it now? At 65%? More? Everyone might place a different subjective number on it, but in relative terms, it has moved far indeed from its former positions, and in the big picture, the overwhelming "consensus" direction of movement remains toward more central state power. Looking just at 2011–2012, where on this front–back scale should one place "legalized" extralegal military detention or assassination? Where should one place armed raids on small-scale farmers selling raw milk to eager customers in search of more healthful products?

The original French left–right scale was focused on the question of change. Should the familiar old ways be preserved or should something new be done? Included in the "left" were the great French economists Bastiat and de Molinari, who wanted to largely or completely eliminate the powers of the state in many areas in order to let civil society and economy function properly. They did not want to transfer those same or even greater powers to some other form of mass-coercive organization. Their main goal was to eliminate those powers to intervene and invade people's lives, not reassign them. "Change" meant reducing the powers of the state and the cronyocracy.

Only shadowy suggestions of that spirit have survived in the modern left. What is the party of "change" now? Allegedly "left" Barack Obama was voted in on an anti-war, pro-civil-liberties ticket with the word "change" featured on his campaign materials. After taking office, however, he appears to have carried forward and expanded some of the worst policies of his predecessor. Whatever one's opinion of Ron Paul, it is widely agreed that he is focused on making serious changes to core status quo policies. If the classical "change" versus "status quo" definition of the left–right spectrum holds up, Paul must be further "left" than any of the other candidates. Yet many think of him as being well to the "right."

The primary question debated along the modern left–right scale is quite different than the kind of debate suggested by the original French one. There is no longer any fundamental question of reducing the total net power of the state. The idea that the modern right wants smaller government is a ghost from the quite distinct "Old Right," and survives today mainly as empty rhetoric. The modern right wants the government to be bigger in different places than the modern left does. Both major parties have long been united on ratcheting up big government; they just differ at times on precisely how and where and for the benefit of which exact blend of special interests. From the perspective of anyone in a different position along our suggested front–back scale, the major parties have been increasingly coming to be indistinguishable from one another on the biggest issues, and by the biggest issues I mean war versus peace and police-state versus republic.

How to graph Ron Paul

Using this model, we can view Ron Paul's 2008 and 2012 presidential campaigns as primarily addressing issues along this front–back scale. This scale is much more important in understanding the core of his campaign message than struggling to place it somewhere on the left–right scale. Paul himself opened his 2008 The Revolution: A Manifesto by deconstructing the false alternatives the modern left–right scale sets up. In contrast, his unique location among modern politicians on the front–back scale better explains his broadening crossover appeal.

Imagine the whole left–right line being configured nowadays such that it crosses over the front–back line at somewhere around 65%–75% state power. Ron Paul would be effectively invisible to anyone looking only along the usual scale from left to right. Conversely, he might stand out to others for exactly the same reason. He is the only candidate substantially off of the conventional left–right scale as it is now positioned along the front–back scale. He thus appears either completely unfathomable (is that why some media people so awkwardly try to ignore his prominent existence in poll results?) or as an intriguing alternative.

In this proposed two-dimensional view, the mainstream candidates of both parties can be seen arguing with each other about how and where to grow state power even further based on their "left–right" differences. Meanwhile, Ron Paul is saying that we should be moving that whole power meter, left, right, and center, in the other direction along the front–back axis.

This view reveals that the American political culture has been moving steadily in the direction of greater state power since soon after the revolution. The American revolutionaries and loyalists were divided over what the natural order of society was, monarchy or some form of self-government. The idea of central planners fundamentally deciding how society should be and then using the police powers of the central state to try to engineer it that way would only mature later as statist ideology evolved. There have always been left and right camps, and one side might lean more or less toward the front or back, tilting the angle of the crossbar one way or the other. Nevertheless, a monocular focus on the left–right scale alone obscures the long-term movement of the entire political culture toward greater central state power and away from individual liberty and civil society institutions.

We are supposed to be enchanted by the theater of differences between the heads of a two-headed beast. We are not supposed to notice that the whole two-headed beast has been lumbering in the direction of ever-expanding powers for itself and special privileges for its camp followers of all parties.

From that perspective, it is encouraging that more and more people, especially among the young, are beginning to notice. Could this be a sign that the illusion-holding power of the one-dimensional left–right scale is weakening?

The three-dimensional visitor to two-dimensional Flatland was not a beast, but the two-headed, two-armed, bipartisan leviathan is. Ron Paul is the only candidate who is working to turn that whole beast around and walk it back in the direction of its cage.