Josef Tětek is a brand ambassador for SatoshiLabs and Trezor.
It’s a tulip craze, a Ponzi scheme, a bubble that is about to burst. You’ve heard it all before. And not just from your Nocoiner friends: this story has been pushed for years by many famous economists with a Nobel Prize on the shelf. Why don’t renowned economists see the value of Bitcoin? It is not a failure of understanding. There is a worldview difference.
The influence of the mainstream economy should not be underestimated. As John Maynard Keynes said, “Practical men who believe they are completely free of intellectual influence are usually the slaves of a deceased economist. Authority lunatics who hear voices in the air distill their frenzy from an academic scribe a few years ago. “This fits perfectly with current economic policy. So let’s see how the madmen and writers view the current economy – and with it society itself.
What is mainstream economy anyway?
Mainstream economics is mostly a mixture of two dominant economic schools of thought.
Keynesianism in its various forms (i.e. post-Keynesianism, new Keynesianism) has a strong focus on the economic aggregates: GDP, unemployment rate, consumer spending, inflation as measured by consumer price index (CPI), and the like. Market forces are viewed as chronically inadequate due to various alleged market failures. Society constantly needs public goods that are provided by the government. In the eyes of Keynesian economists, public spending is a panacea and should, if necessary, come at the expense of high budget deficits. Interestingly, Keynes himself only imposed public deficits in downturns; But the US budget has been in deficit in 46 years of the past 50 years, even during periods of strong economic growth.
Monetarism also focuses on the economic aggregates, but its rules are: monetarist in nature: Instead of fiscal measures, the economy should be supported by the measures of the central bank. Inflating the money supply, manipulating short-term interest rates, stepping in as the lender of last resort, buying up mortgages, bonds or even stocks – all of these measures steer the economy in the eyes of the US away from the inevitable crash, deflation and unemployment monetarist.
Today’s economists, advisers, and government officials usually hold these two views of business together. Hence, economic policy should be liberal with taxpayers’ money and also with their purchasing power. It’s important to note that monetarism began to play a role in the mainstream economy in the 1970s after the U.S. dollar was decoupled from gold and the whole world was under a pure fiat monetary standard with no connection whatsoever to gold. In a way, monetarism came to the aid of Keynesianism: In view of the ever-increasing debt, an argument had to be found for ever lower interest rates. Chronic deficits result in the need to inflate debt through simple monetary policy. And simple monetary policy, in turn, is a powerful incentive to get into more debt – for the government and the economy at large.
While economic policies based on the mainstream economy have appeared to work in the last few decades, they are doomed to fail in the long run. Snowball debts fueled by simple monetary policy are just not sustainable and there has to be something: Either the debt will default or the purchasing power of fiat money will evaporate. Dylan LeClair sums it up: “Mathematically, there is no way out of the current economic environment.”
The Fiat way of thinking
Instead of money that was created with the click of a mouse, we have money that needs to be mined – created through resource-intensive calculations. … In other words, cryptocurrency enthusiasts are effectively celebrating the use of cutting edge technology to put the monetary system back 300 years. Why do you want to do this What problem does it solve? – Paul Krugman
Now let’s answer the first question: Why do mainstream economists hate Bitcoin?
The above quote from the renowned nobelist helps us answer the question. It is noteworthy that the mainstream economist sees what a solid money advocate sees as the main advantage of Bitcoin as its disadvantage. For Paul Krugman (now an epitome of mainstream economics), Bitcoin is a financial setback because you can’t create sats at the push of a button.
This is a fiat mindset: the worldview that the state and its experts should be able to create and inject money at will because they supposedly know better. We can call this by its real name: money socialism. The state defines what money is through legal tender laws and sets monetary policy (i.e. the rate of money creation), the state decides who the new money will reach first, the state sets the interest rates, the state pushes people in and out of savings Towards debt. Although the state pays lip service to the market for instruments such as “open market operations”. In the age of fiat money, there really isn’t much room for real market forces.
One of the basic functions of money is (or should be) its role as a store of value. But there is no place for economists to work for that. Since money can be created out of nothing, there is no point in holding it for the long term. Investments, you say? But why, we have loans with ever lower interest rates! What about the safety net? Welfare programs! That’s why you will never see a mainstream economist admit that Bitcoin has the value of quality: it’s like asking a color-blind person to enjoy the rainbow. They just don’t have the ability to see it.
And it makes sense from the point of view of mainstream economics: the only way out of the Keynesian debt hole, besides total insolvency, is inflation. The idea that money should act as a store of value is absurd when you have the mainstream worldview. Money should serve as a medium of exchange. It is enough if it does not hyperinflate in the short term, but to lose most of its value in the long term is desirable.
The Austrian alternative
Every rational act is first and foremost an individual act. Only the individual thinks. Just the individual reasons. Only the individual acts. – Ludwig von Mises
The main problem with the mainstream approach is its focus on the aggregate and little attention is paid to it Individually Actions and relative Forces that affect the economy. While the government or central bank can stimulate the economy to grow, the structure of the economy can become unstable as a result. Just think of the 2008 financial crisis: the US economy seems to have grown strongly for years, but that growth later turned out to be quite toxic and the entire financial system almost collapsed as a result. And the solution was similar according to the general rule: more deficit spending, lower interest rates, and unprecedented monetary policies like quantitative easing.
The Austrian business school focuses on exactly what the mainstream ignores: relative price changes, capital heterogeneity, incentives in the private and public sectors, shifts in time preference over monetary policy. If you have difficulty understanding what this means, it can be simplified to one key idea: individual human action. Everything that happens in business is based on the fact that individuals act. The individual is motivated by subjective preferences and the incentives to which people are exposed. Economic policy can be viewed as an attempt to manipulate the incentive structure: lower interest rates and people are encouraged to go into debt and prefer consumption to investment.
In contrast to the mainstream economy, the Austrian school is not technocratic in nature. The supporters of the Austrian economy understand that the economy is fundamentally not controllable. However, the lack of conscious management does not mean that chaos will arise. As Hayek explains in one of the greatest economic articles of all time, individual actions are coordinated via the price mechanism. The economy is a complex system in constant flux, and the relevant data points on supply, demand, scarcity of resources, and individual preferences (and the endless changes in these factors) are distributed among millions of people. It is impossible to communicate every data point in its complete form – instead the smallest useful information about the price is communicated. The price is all the information that manufacturers, distributors, investors and consumers need to know in order to adjust their actions and better reflect reality.
When the money itself is subject to central planning, a lot of noise pollutes the pricing mechanism. In order for the pricing mechanism to send out pure economic signals and for the economy to function properly, money should be separated from the state.
It is important to underline What kind of money is. Money, in its most basic sense, is a social institution – a set of rules and habits that make it easier for people to work together. As Nick Szabo points out Shoot atThe institution of money arises wherever we look in the course of history, because it simply makes sense for society to achieve a sufficient division of labor. Money arose out of the need to store the value of one’s labor for later use and to exchange the value with others. Both the store of value and the medium of exchange are crucial for money to play its role in society. And it is no coincidence that Bitcoin emerged and started at the height of a global financial crisis when the store of value of today’s money was sacrificed to hold the system together.
Everyone has a bias. The author of these lines is biased towards non-governmental solutions to society’s problems, and this bias is based only in part on value-free economic arguments. Political philosophy and self-interest are natural to people and we shouldn’t be afraid to admit that. The Fiat mindset is a tendency of those who have lifelong incentives to maintain the status quo.
The idea of depriving monetary policy of human discretion is completely different than it is today. This is a big problem for the mainstream economy, which is focused on money as a short-term enabler that cannot be saved but only spent, inevitably for the benefit of those who print it.
Therefore, mainstream economists will fight Bitcoin until the bitter end of hyperbitcoinization. Bitcoin as a burgeoning money phenomenon is a slap in the face. It has the potential to completely destroy the illusion of technocratic management. When the state loses the ability to manage money, the formula that has worked for the past few decades falls apart: no money inflation, no Cantillon effect, no chronic public deficits, no bailouts. The house of cards falls down. But don’t blame Bitcoin for that. The fiat system would collapse even if bitcoin never showed up as central planning always fails. Bitcoin can serve as a lifeboat before the fiat collapses and as a recovery tool afterwards.
This is a guest post by Josef Tětek. The opinions expressed are solely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.