Dear Bob:
Thanks for asking me about this matter. My substantive reactions to your comments are below. But, first, before I get to that, I just wanted to say that I am in 99.9999… agreement with you on matters of Austro libertarianism. And VERY enthusiastically so. I regard your Economic Policy Journal as a no-holds-barred, magnificent, courageous publication, and I am honored to play a small but significant role in it, given my many contributions to it, and your kindness in covering and promoting my thoughts on a large number of topics. I think there are only two issues in political economy where we disagree, this one, bitcoin, and intellectual property. In other words, I have a much closer overlap with you than I do with other people I admire, such as Ludwig von Mises, Murray Rothbard, Hans Hoppe, Ron Paul, all scholars I revere, since I disagree with them on many more issues than I do with you. Also, I think it important that we air our differences on all these issues. How else are we, imperfect creatures that we are, going to get that one millionth of an inch closer to the proverbial Truth? While I’m at it, let me say this: I greatly appreciate your bravery in taking on the powers that be both within, and outside of, the Austro libertarian movement.
Best regards,
Your friend, Walter
Does Anyone Really Use Bitcoin as Money?
I see that Dr. Walter Block has made some initial comments, over at Circle Bastiat, about Bitcoin.
The main focus of his comments is with regard to Bitcoin and the regression theorem. While I do think this is an interesting topic, a few byproducts of Block's discussion of Bitcoin and the RT have caught my eye.
First, Block writes:
The main focus of his comments is with regard to Bitcoin and the regression theorem. While I do think this is an interesting topic, a few byproducts of Block's discussion of Bitcoin and the RT have caught my eye.
First, Block writes:
Probably, the govt will soon blow this out of the water with regulations, taxes.
I agree. Both China and India have provided examples of how this could occur with their recent shutdown of Bitcoin activity. While many argue that Bitcoin is beyond the reach of governments, daily commercial transactions are not. China and India have simply made it illegal for businesses to deal in Bitcoin at the daily transaction level. Beginning and end of story.
Bitcoin at present is not a threat to Master Card, Visa or American Express. Despite all the hype, there remains very few Bitcoin transactions at the retail level. If Bitcoin ever appears to become a threat to the major current day transaction processors such as MC, V and AE, you can be sure teams of lobbyists will descend on Capitol Hill to nudge Congress into some type of regulations on transactions that will cripple Bitcoin as a method of transacting business, the type of regulations that China and India have already implemented. It can be done.
Bitcoin at present is not a threat to Master Card, Visa or American Express. Despite all the hype, there remains very few Bitcoin transactions at the retail level. If Bitcoin ever appears to become a threat to the major current day transaction processors such as MC, V and AE, you can be sure teams of lobbyists will descend on Capitol Hill to nudge Congress into some type of regulations on transactions that will cripple Bitcoin as a method of transacting business, the type of regulations that China and India have already implemented. It can be done.
<< I fully agree with you on this.
A second point made by Block is this:
More than just a few people treat it [Bitcoin] as a money.
I'm not sure this is the case. From my perspective, people treat something as money when they think in terms of that item and are willing to enter into fixed contracts with that item. In the US, dollars are money and we daily enter into all kinds of transactions with dollars, instant transactions and longer term contractual transactions.
This is not going on with Bitcoin, though it may appear that it does. We have seen a small town sheriff say he wants to get paid in Bitcoin, but he is surely not thinking in terms of Bitcoin. His salary is fixed in terms of dollars, and each month depending upon the price of Bitcoin, he will receive payment converted to bitcoins. BUT, he is getting a fixed dollar value of income. Both Virgin Airways and Overstock have announced that they are going to accept Bitcoin, BUT both are setting prices in terms of dollars and asking for Bitcoin payments at the time of the transaction based on the fixed dollar price, not a fixed amount of bitcoins. Both VA and O also appear to be converting immediately (or plan to convert immediately in the case of O) their bitcoin receipts to dollars.
In other words, no one is pricing things in terms of a fixed Bitcoin price, the way things are priced every day in terms of dollars. In my view, this means that Bitcoin is not being used as money, but is being used more like a gyrating American Express travelers check. If the day ever comes when prices are set in terms of fixed amounts of bitcoins, and people are willing to take their wages in terms of fixed amounts of bitcoins, then, in my view, we can say that people are treating Bitcoin as money. This is not occurring now.
This is not going on with Bitcoin, though it may appear that it does. We have seen a small town sheriff say he wants to get paid in Bitcoin, but he is surely not thinking in terms of Bitcoin. His salary is fixed in terms of dollars, and each month depending upon the price of Bitcoin, he will receive payment converted to bitcoins. BUT, he is getting a fixed dollar value of income. Both Virgin Airways and Overstock have announced that they are going to accept Bitcoin, BUT both are setting prices in terms of dollars and asking for Bitcoin payments at the time of the transaction based on the fixed dollar price, not a fixed amount of bitcoins. Both VA and O also appear to be converting immediately (or plan to convert immediately in the case of O) their bitcoin receipts to dollars.
In other words, no one is pricing things in terms of a fixed Bitcoin price, the way things are priced every day in terms of dollars. In my view, this means that Bitcoin is not being used as money, but is being used more like a gyrating American Express travelers check. If the day ever comes when prices are set in terms of fixed amounts of bitcoins, and people are willing to take their wages in terms of fixed amounts of bitcoins, then, in my view, we can say that people are treating Bitcoin as money. This is not occurring now.
<< Here we disagree a bit. It is my understanding that money is defined as a generally accepted means of final payment. In my view, it is not a necessary part of this definition that people think in terms of any given money. For example, when I go to a foreign country, where I’m going to be for only a few days, I certainly don’t think in terms of the local money. Yet, of course, it is money and I use it as such, but awkwardly so. Here’s an analogy: I think in terms of Fahrenheit, not Centigrade. People in Canada are more accustomed to the latter. But, both are of course valid ways of measuring temperature. Ditto for English measures of weight, distance, versus the metric system. Not everyone has to think in any of these terms for them to be functioning. But is bitcoin generally accepted? Of course not. At least not yet. But, to me, it is an empirical question of whether it one day would be generally accepted, if the government kept its mitts of, which is unlikely in the extreme exactly as you say. Still, it is an interesting question. My own prediction on this is that it depends on just how badly the Fed continues to screw up. If very badly, then, long before we get to Zimbabwe or Germany in 1923, bitcoin might well become money. (Although, probably, the Canadian dollar, or the Euro, would come into play instead.) Then there is the continuum issue (Block and Barnett, 2008). Suppose that the number of people now using bitcoin doubles, and then doubles again. How much “doubling” must there be before we can call it a money, or a medium of exchange? I think there is no clear unambiguous answer to this question. It is sort of like asking, what is the right age of consent for statutory rape laws? Is it 15? 16? 14? 17? We can perhaps say that all of these ages are reasonable, and that clearly four, five, six, twenty two, twenty three, are not. The former ages are way too young, the latter too old. But, there is no one right answer, I think, that can be logically deduced from libertarian principles. In the free society, the private courts would decide matters like that.
Block also states that
Block also states that
I’m not aware of any formal discussion of this [Bitcoin and the regression theorem] in the literature.
I would argue that part of Murray Rothbard's critique of Hayek's support for denationalized money applies to Bitcoin (See: Murray Rothbard: Bitcoin is a Crank Scheme)
<< Here we have another disagreement. I do see your point about an analogy between Hayek’s cockamamie constructivist scheme (Block, 1999) and bitcoin; indeed, there are strong similarities. But there is a disanalogy too. For example, no one ever used Hayek’s “ducat” where at least some people use the bitcoin. Surely, that’s a pretty important distinction. By the way, Murray never said that “Bitcoin is a crank scheme.” He only said that of Hayek’s proposal. This does not mean that Murray was infallible, or that I am here guilty of employing the fallacious argument from authority. As I say above, I do disagree with Murray on some issues, but not regarding his brilliant evisceration of Hayek’s monetary crankism.
Bob, I hope this is of some help to you. I am honored that you would seek my opinion on this important issue.
Stay tuned, I am going to ask Prof. Block to respond to my thoughts.
Stay tuned, I am going to ask Prof. Block to respond to my thoughts.
References:
Block, Walter E. 1999. “The Gold Standard: A Critique of Friedman, Mundell, Hayek, Greenspan from the free enterprise perspective,” Managerial Finance, Vol. 25, No. 5, pp. 15-33, http://giorgio.emeraldinsight.com/Insight/viewContainer.do?containerType=Issue&containerId=13529; http://www.mises.org/etexts/goldcritique.pdf
Block, Walter and William Barnett II. 2008. “Continuums” Journal Etica e Politica / Ethics & Politics, Vol. 1, pp. 151-166, June; http://www2.units.it/~etica/ ; http://www2.units.it/~etica/2008_1/BLOCKBARNETT.pdf
Wenzel comments:
With regard to point 2:
I would argue that everyone thinks in terms of a money all the time. The reason in a foreign country one needs to use the local currency is because that is the currency people in that country think in terms of---even more so than the local language, it is necessary to transact in the local currency. In modern civilization, everyone thinks in terms of some currency. If you are in a foreign country, what happens is that you are converting in your head the exchange ratio of the currency in that country to the currency in which you think, to get a sense of what the exchange means. It is not the case that you are not thinking in terms of a money. You are thinking in terms of the money you know, always.
I would further argue that if you spent any serious length of time in a country, you would start thinking in terms of that money, perhaps becoming a bi-monetary thinker. I would argue that at present NO ONE thinks in terms of Bitcoin, anywhere. When a Bitcoin transaction is conducted, both parties are translating the transaction into the money and price structure they know. Therefore, Bitcoin is not money. I believe that at the core of money there is the necessity that one understand the broad value of goods a money can buy. When people start saying, "Oh that costs x bitcoins," without doing an additional calculation in their head to a money, that is an important step to Bitcoin becoming money.
I don't believe this is the important question or more correctly sufficent question to call something a money. Many people use travelers checks, and they are generally accepted, but the checks are not money. The important question to me remains are people thinking and understanding value in terms of Bitcoin--of course, the money has to be generally accepted also in a given geographic, or some other defined area. I believe both conditions are necessary.
More on point 2:
I agree with this, though my fear remains that regulations would come in to block Bitcoin use at the public retail level at such time (or even before such time).
As to point 3:
I would argue that Murray, in a manner, anticipated Bitcoin when he wrote in the referenced piece:
The problem, as Hayek's mentor Ludwig von Mises used to point out, is that we might issue these notes to our heart's content, but that nobody (except perhaps a few misguided friends or relatives) would take them.
Admittedly, this is a bit of a stretch, but I believe it shows that Murray understood that an invented currency could be passed around among a group of friends. My stretch of this is my belief that Murray would consider the tech/libertarian Bitcoin fans a modern day internet equivalent of a friends group, similar to the "misguided friends or relatives" group that he mentions.
If you accept my strecth, then I think all the rest of Murray's argument applies to Bitcoin.
Block has the stronger arguments here. I'm interested to see a debate with him on IP as well. Block is the closest thing to Rothbard that exists.
ReplyDeleteI give the debate to Wenzel. I never thought about it before, but I do think in dollars. If I travel overseas, I always do a rough calculation in my head as to the dollar value. Wenzel is correct, no one is doing this in terms of dollars and Wenzel is closer in his argument to Rothbard than Block is, if you look at Rothbard's argument against Hayek, Wenzel seems to have a point that most of it applies to Bitcoin.
Delete"Block is the closest thing to Rothbard that exists."
DeleteWhat kind of argument is that? That's a combination appeal to authority and hero worship. How is Block's argument stronger?
Because the people who are using Bitcoin as money are thinking correctly. It is what they think it is - money. Regardless if it meets the Austrian definition, people think in terms of subjective value: if they say Bitcoin is valuable as form of exchange, and use it as such, then it is money to them. It is NOT money to those who don't like using it.
DeleteHas Bitcoin been used as money by individuals? Yes. Is it the best most wildly accepted form of money? No. Block has it correctly: the state will step on Bitcoin and the experiment will never be allowed to prove itself out.
DeleteThe very fact that governments are taking actions to close down Bitcoin is in fact an admission that Bitcoin is a serous competitor to their monopolistic money. Otherwise how could non-money threaten real money?
ReplyDeleteGood question.
DeleteWhy would the government care about regulating something that doesn't function as a medium of exchange? That has no purpose? If i use a bunch of self made pieces of paper as a medium of exchange and nobody cares to use it as such, the government couldn't care less. And they certainly wouldn't be looking to confiscate any of it.
The fact that government *is* doing that to Bitcoin tells a whole story. At this particular moment, even the government is regarding it as money. That's why they want to step in.
The government also regulates hwala, anonymous debit cards, travelers checks, casino chips etc. It doesn't mean any of this is money.
DeleteBecause even if it's not money, it's still commerce. And the government doesn't want any commerce taking place outside of its ability to tax and control.
DeleteInteresting. The classic definition of money describes money in terms of three functions: 1) medium of exchange, 2) unit of account, and 3) store of value.
ReplyDeleteLooks like Wenzel is taking the position that the most important function of money is that it's a unit of account, which people use psychologically to asset the value of goods and services. Then, since BitCoin is a poor unit of acount or measure of value, it does not qualify as money. I don't think I have ever heard this take on things, but it's certainly an interesting one.
I find it somewhat flattering that Robert Wenzel considers Snoop Dogg, the Winklevoss twins, and some of the top financial minds in the world to be part of my "group of friends," but this is unconvincing at best. As with other media of exchange, individuals are valuing it for the price it commands on the market, its price history, and the factors influencing their perceptions of the future price. This is no tacit agreement between friends, and to argue that you'd have to deny the facts.
ReplyDeleteHere's the biggest problem with this line of argument, and for someone who spent most of the last two weeks in an "I'm more Austrian than you are" pissing match, Wenzel should get this: Defining what is money by its subsidiary functions (unit of account, store of value, etc.) is profoundly un-Austrian. In the Austrian tradition, "money" is defined as Dr. Block defined it: A generally-accepted medium of exchange (or "means of final payment). Something can be a medium of exchange or even a money without being the unit of account; when I trade silver, I use dollars as the unit of account, but silver is the medium of exchange. There have been many historical examples where the actual money in a region (the generally-accepted means of final payment) was something other than the unit of account (a former money).
Bitcoin is not yet money in the Austrian sense, but its proponents do not claim that it is, either. It is a medium of exchange, and may someday become money. As it becomes more generally accepted (if it does), it will be more often used as a unit of account. As adoption increases (if it does) and a longer trading history is available, it will be valued relatively more for liquidity than for expectation thereof, and volatility will decline. As regulatory uncertainty decreases (which will naturally happen over time), volatility will decrease, and it will become a better store of value.
The key features of EPJ's discussions of Bitcoin have been (1) Shaky grasp over the technical facts, (2) Firm, unshakeable belief in the almighty power of government to do whatever it wants with Bitcoin (which doesn't jive with the data -- Bitcoin sales are rebounding in China and India).
Notably absent have been actual analyses based on Austrian Economics. (note: "Murray Rothbard once said X about Y and I can make an argument that it's vaguely related" is not an economic analysis.)
You better re-read EPJ. I will point out just a couple of your horrendous errors. I have never defined money as a "store of value" in my commentary on Bitcoin. NEVER. This blows apart most of your critique of my "shaky grasp."
DeleteSecond,you write:" As with other media of exchange, individuals are valuing it for the price it commands on the market, its price history, and the factors influencing their perceptions of the future price." Just because something commands a price does not mean it is money. Give me a Piacsso painting and I will accept it, but it is not money. I will even trade you my car for Picasso because of the history of Picasso prices, but that doesn't mean Picasso's are money.
Your grasp is beyond shaky, it is downright bizarre.
"I have never defined money as a "store of value" in my commentary on Bitcoin. NEVER. This blows apart most of your critique of my "shaky grasp.""
DeleteMy reference to your "shaky grasp" was on the technical aspects (and the question of whether it is a good store of value is not one). You don't understand the technology very well, which has led to some... interesting statements on your part. My reference to "store of value" was part of a partial list of secondary characteristics of money, and thus did not imply that I accused you of using it in your definition. Read more carefully before you allege that you've "blown apart" a critique that you don't seem to have understood.
"Just because something commands a price does not mean it is money. Give me a Piacsso painting and I will accept it, but it is not money. I will even trade you my car for Picasso because of the history of Picasso prices, but that doesn't mean Picasso's are money."
False equivalency -- I didn't claim that anything that commands a price is money. Mises details that media of exchange (such as Bitcoin) are valued for the price they command on the market, as opposed to use value. Your Picasso comparison fails at the outset because a Picasso painting is not a medium of exchange.
Far from having a "bizarre" grasp, I actually have a Misesian grasp. My question throughout these months of your commentary has continually been "Has this guy even read Theory of Money and Credit?" Take your "traveler's check" example in your discourse with Block. In Misesian terminology, it's a "money substitute" -- a claim on that amount of money denominated in a chosen money. Of course it's not money itself -- that's the entire point. The ONLY questions posed by Mises, Rothbard, and the rest of Austrian monetary theory as to whether something constitutes a "money in the narrow sense" are (A) whether it is a medium of exchange, as opposed to something constituting another form of money in the broader sense, such as money substitutes, and (B) whether it is generally-accepted (which is contextual and subjective, as neither Mises nor Rothbard define what exactly they mean by it).
Despite your bloviations, you haven't actually
You certainly did imply I used "store of value." What the hell is this:
Delete"Here's the biggest problem with this line of argument, and for someone who spent most of the last two weeks in an 'I'm more Austrian than you are' pissing match, Wenzel should get this: Defining what is money by its subsidiary functions (unit of account, store of value, etc.) is profoundly un-Austrian. "
You weren't clear as to what you meant by "technical," which I guess shouldn't surprise me. "Store of value" could be considered a technical point, especially given you referenced it as a subsidiary function. If you mean the technical creation of Bitcoins, I am really not sure because you don't say, but that is the sacmmiest part of Bitcoin with its use of "energy" and the solving of algorithms. Bitcoin is a ledger system that doesn't need any of that, see the e-currency Ripple. You are really in mad man's land if you think energy and solving of algorithms is important to e-currencies.
You completely fail to understand my Picasso analogy.
Your comments on Mises are totally baffling. For example, your understanding of money substitutes is wrong. You write money substitutes are not money that is not always the case.
Here's Rothbard:
"When banks are legally permitted to abandon a 100-percent reserve and issue pseudo receipts[...] the issue of uncovered money-substitutes adds to individuals cash balances and hence to the money supply."
You are what I call a buzzword man. You pick out buzzwords from people like Mises and Rothbard but have no sense of how they all fit together. That's probably why you also fall for the Bitcoin buzzword nonsense around the "technicals" of Bitcoin "energy" use and the solving of algorithms--which have zero to do with the essence of e-currencies, but give enormous comfort to the clueless.
Gentlemen,
ReplyDeleteIn relation to 1. If you actually read and understood what happened in China, first Baidu stopped accepting bitcoin because of its fluctuation against the renminbi; second the PBOC stopped accepting NEW deposits which made it difficult (not impossible) to transact with bitcoin. All this relates to capital controls. As for Mastercard, Visa et al, when the dollar blows up it won't matter. It will be like in Argentina or in Zimbabwe. Why don't both of you speak to someone in one of the those countries about how as the currency blew up they "used" their credit or debit cards to pay for things when interest rates were running at 500+%. I'm sure there credit cards were very useful! Rather than destroying bitcoin, it will only serve to push it to the fringe until the dollar and it's sister currencies blow up.
2. You're both focused on the wrong aspect of people's behaviour. What matters (and where for people and organisations it is perceived as having value) is that the currency in which they are presently thinking (i.e. the dollar for example) is perceived as losing its purchasing power rapidly as well as the fact that the existing financial system is seen as insecure. By that I mean that one, your funds can be confiscated and two, you have little recourse. Please don't talk to me about the FDIC since I'm sure that you know that there is 370 more deposits in banks than there is insurance. That's excluding the hundreds of trillions in derivative exposure that the TBTF banks moved into FDIC insured accounts. Starting to understand why bitcoin is perceived as having value?
3.As to the last point, as I pointed out in my comment yesterday, Rothbard's critique is not applicable to bitcoin because the context is different. As I pointed out in 2. the reasons that people value bitcoin is 1: the existing fiat currencies are perceived as losing purchasing power; 2: people want to be able to transact without outside of the eyes of government; 3: they want to be able to cross borders without having their funds confiscated; 4: the financial network for transacting in those currencies is seen as corrupt without. As for Rothbard's final solution, why not tie bitcoin to gold. That way, there's absolutely no possibility that the government would ever be able to manipulate the money supply since both are outside of its control.
Sorry, as to point 2, you need to look at the germanic speaking countries (i.e. switzerland and germany) who are actually embracing bitcoin because they perceive it as a safer choice to either the CHF or EUR (both of which are being printed ad infinitum).
ReplyDeleteAre they taking their salaries in Bitcoin? I doubt it, given it volatility. Show me newspaper ads in Switzerland or Germany where good are priced in Bitcoin, not where bitcoins are being "accepted" but where goods are priced in terms of bitcoins. NOT HAPPENING. It would be insane for a business to pay salaries and price goods in terms of Bitcoin given it volatility.
DeleteDon't judge the infant before he grows into a man.
Delete@ JayTe:
DeleteAs I asked you on a different post, why is Bitcoin going to be the primary landing spot when a fiat currency implodes? Unless they all implode at once, the most probable outcome is people will first shift to a different, already widely used fiat currency, and then to any number of things, especially gold and silver, which have centuries of prior monetary use history.
Also, here is a good thought question for people who say they use bitcoin as a medium of exchange: What is the value of your bitcoin holdings relative to your dollar holdings? Because if you hold MORE bitcoin than dollars, that means you are NOT using bitcoin as your primary medium of exchange, but instead holding it as an investment. Because by definition, media of exchange are quickly exchanged. For example, people actually hold very little dollars relative to their monthly income, because they are constantly spending it.
My guess, and I could be wrong, is that even if you are constantly exchanging bitcoin in daily exchanges, the vast majority of bitcoin owners are sitting on them, stockpiling them as investments for FUTURE use if/when they become media of exchange. If so, this means that even the proponents of bitcoin are not really doing what they want everyone else to do. Seems that they want everyone else to start quickly turning over their bitcoin (despite the horrendous risk from price fluctuations) so that their dormant bitcoin holdings will gain in value. So if you want to be consistent, seems like you should lead out and get rid of your bitcoins in exchange.