Some Funny Thoughts on Economics
by Alpheus Madsen
As a mathematician pretending to be a software developer recently looking for work, I couldn’t help but notice that there’s been an up-tick in companies looking for software developers who can program on blockchains — in particular, for projects to create automatically executable contracts for cryptocurrencies. I have learned a bit about these, and am particularly intrigued by the idea of recording transactions in a way that isn’t very susceptible to forgery … but for all the promise to revolutionize things, I would have to confess that I have a hard time accepting cryptocurrencies. And part of the problem is that I’ve encountered some rather bad economic thoughts I have associated with the justification of cryptocurrencies.
The biggest one, encountered a few years ago by a Bitcoin miner, was “cryptocurrencies have value because they take resources (energy, typically from coal) and labor (computers plugging away at computation) to create!” Ah, the labor theory of value … the heart of Marxist thought … and something for which counter-examples abound! No, there’s no inherent value in consuming — I can burn coal to crush big, smooth blocks of granite into rubble — but neither the coal I put in, nor the labor I exert to fill that hopper, will give that rubble any value. Indeed, I am wasting coal, my time, and fantastic blocks of granite that can be used for counter tops, buildings, and machine shops for both function and beauty. I am destroying value.
No, the value of cryptocurrency is, paradoxically, based solely on people choosing to value it. And this is true of everything, not just cryptocurrency. And people have all sorts of reasons for valuing something: it’s necessary for life, it can be used as a stable platform for putting things together, it’s pretty, it’s scarce or abundant (water is necessary for life, but because we have so much that our fundamental needs are met, we don’t value it as much as pure diamonds set in gold …) This core idea — called “marginal value theory” — is a fantastic explanation of why rare useless things can command such a high price!
Another funny idea (which I’m fairly certain I encountered in a cryptocurrency forum, but my memory is a little fuzzy on that) is the notion that, because inflation benefits people who are in debt — people who are allegedly poor — while deflation “only” affects people who are rich, we should always favor inflation, and always fight against deflation.
Sigh. This kind of policy doesn’t favor the poor. It favors people who have short attention spans, who can only see what the want right now and don’t care that, if they hold their horses, they can get even more, if they just wait until they can afford it; meanwhile, people who have even a modicum of future preference, who decide to save for the future, are screwed by inflation, because whatever they save now, becomes less worthwhile in the future! This can hurt the poor, because the poor widow trying to save her mites gets to see her mites evaporate … but what’s worse, is that it hurts the poor who are trying to become rich!
After all, who are the poor people? The people who can’t look beyond the horizon, and go into debt for everything. Who are the rich people? Generally, the people who diligently stay out of debt, and who save a little bit every month, so that it can grow into something that can allow them to retire — and sometimes even retire with style! Sure, you may have the occasional person who is bankrupt because of severe medical issues, or the occasional trust fund baby who is rich because their parents were rich … but these are far more often the exceptions rather than the rule, and too often, these exceptions are used to justify policies that are destructive to everyone, rich or poor.
Granted, at some point, I need to realize that these ideas aren’t necessarily inherent to cryptocurrency, and I need to dig into the core ideas to get a better feel for what value cryptocurrencies offer to us (beyond the crazy fluctuations that both make and break fortunes), but at this point, I’m on a roll, so I’m going to offer a crazy thought I happen to believe: that it’s this kind of thinking that gives us business cycles.
There’s a certain school of economic thought, called “The Austrian School”, that is convinced that saving is the key to economic advancement: by saving, day by day, some fish, at some point, I can take a week to make a fishnet, which can then allow me to catch more fish, and then take time to build a house, and so forth. Additionally, this school of thought is convinced that forcing interest rates to be below natural market value, is what causes bubbles that pop: artificially low interest rates lull businesses into believing they can expand, and so they do … but that produces inflation, because everyone thinks they can expand … which means that the businesses can’t expand as fast as they thought they could … which over-extends the businesses … until they can’t extend themselves anymore, and have to close things down, cancel projects, and lay off employees.
In contrast, the Keynesian school is convinced that savings is the enemy of prosperity — that we can tax and spend and go into debt, and so long as we have a Central Bank of some sort controlling our currency, and carefully controlling interest rates (usually by forcing interest rates to be lower than the Market says they should be), we can get rid of business cycles! Indeed, the Federal Reserve has been created precisely to do this. And oddly enough, the fact that we’ve had at least a dozen bubble pops (including one where the economy hadn’t recovered for an entire decade) hasn’t given very many people pause to reflect that hey, this Federal Reserve controlling the economy thing isn’t working as we expected … if anything, the assumption seems to be “Hey, it’s a good thing we have a Federal Reserve! Just think of how bad things would be if we didn’t have one!”
One final thought: when I took a Microeconomics class in college, one of the books we had was a history of economics focusing on six economists. I can’t remember who all the economists were, but I remember that Adam Smith, Karl Marx (who did for economics what Sigmund Freud did for psychology: took his personal, warped life, which was separated from the rest of mankind, and projected it onto everyone else), Milton Keynes, and some guy named Veblen were featured. Years later, I have come to that certain other economists — Milton Freedman, Ludwig von Mises, some guy named Hayek — were completely absent. I don’t necessarily think that this was on purpose, but considering that these economists pretty much go against the grain of all the others (with the possible exception of Adam Smith), it’s a pretty huge blind spot in the world of economics!
And now that I have written all of this, I think I have an inkling of understanding of why I don’t necessarily think that cryptocurrencies will fix everything. The solution that they are trying to offer — the decentralization of the control of currency, and the establishment of a decentralized way to definitively know who owns what — doesn’t solve the core problem that causes our economy to spin out of control: the conceit that is well-ingrained in our government, heck, even our society, that if only we had people who know what they are doing at the head of everything, they can fix things, and make sure that things run smoothly! (The actual solution seems to be “get out of debt, stay out of debt, and save money”, which doesn’t seem to be a very popular suggestion among the “elites”, and everyone else, for that matter …)