The Bitcoin Economics lesson for Engineers
econgoat.com
econgoat.com
When you don't have a sound scientific basis for your discipline, you need something to step in to fill the void - in order to make other humans believe in your worth. Economists use their enormous egos, as well as the frailties inherent in the egos of others.
Heather R Morgan has not written an article which rises above the flaws of her discipline. It starts with a jibe - oh, you invested in bitcoin, why not flush it down the toilet - that's HOW STUPID YOU WOULD BE...
Engineers and hackers don't have to worry about whether or not their discipline makes a genuine contribution. They have proved themselves time and time again. They build a product - ship it - and if it fails, they start working on the next idea. They don't have to worry about fighting over 'theories' with academics who desperately claw at one another for those disappearing tenure tracks.
As we who have spruiked for bitcoin have always said: "This is an experiment that might fail."
Heather might want to consider switching to a discipline in which experiments are even possible...
If you are interested - I've written at (great) length my thoughts about this argument here:
http://reviewsindepth.com/2013/12/bitcoin-krugman-and-the-me...
Have you considered a career in science fiction or as a song writer?
"I'm torn between the light and dark, Where others see their targets, Divine symmetry. Should I kiss the viper's fang, Or herald loud, the death of Man. I'm sinking in the quicksand, of my thought, And I ain't got the power anymore."
I think David Bowie put it a little bit better and he did come up with a pretty great melody and chord progression for the tune, but don't let that get you down, you gotta start somewhere, right? I think he said it better because he had the ability to discern the difference between fantasy and reality. He then learned to channel his apocryphal visions in to art. You're wasting your talents here in reality, my friend!
I would be keen to know your opinion after reading the whole article. I assume you haven't - because I do at least make an argument for that claim, and you don't attempt to address it before calling me deluded. Given the large amount of effort I put into that article, don't you think I might deserve this much at least?
Listen dude, I don't think Bitcoin is valueless. It is an interesting solution to a number of technical challenges in distributed computing. It may even very well work as some sort of digital currency.
What I don't think is that it is going to change the world. You and every other maniac out there is actually doing a disservice to the acceptance of the technology. What kind of loony expects someone to read a 10,000 word essay that starts off with some sweeping claim about how 'everything's different now!'?
You don't know shit about the world. You couldn't possibly have enough experience or knowledge to piece together any sort of valid prediction, just like every other motherfucker out there. You've just got faith in some grand tale that honestly isn't that different from any other end-of-time story, like say, the Book of Revelations.
You're right to point the finger at economists when they make grand sweeping claims. They're just storytellers. There's a reason it is considered a liberal art.
Computer programmers and engineers aren't much more than storytellers either. There is even more danger of delusion in software because entire virtual worlds are created and then assumed to be real.
Math is the language of nature.
Truth is the language of man.
Learn to tell the difference.
I don't expect you to read it at all. I couldn't give a tinker's cuss if you do or don't. Generally though, if you don't want to look like a fool, it's best not to express an opinion about a piece you haven't read.
The claim you are so hostile to is actually not even particularly controversial. It's a conditional statement for one thing (you don't even read an introduction carefully) and it's easily defended. It's a fact that no currency has ever been widely adopted without having some kind of intrinsic or government mandated value. Plain, historical fact. Bitcoin has no intrinsic or government mandated value. So if it gains widespread adoption, then I don't see how you could possibly deny the historical significance of this. A large amount of economic orthodoxy goes out the window.
If you are willing to address this argument, I'm willing to listen. But if you're just here to beat your chest and get all alpha on me then I might point out you're better off hitting the gym and cruising the bars. It's more likely to get you laid than arguing with me.
Arguing with you about your faith in the world changing powers of Bitcoin would be like arguing with a Christian about the Bible.
I'm not saying that Bitcoin is useless. I'm not saying it is without value.
I'm saying that the kind of zealotry you're exhibiting is nauseating and nothing new.
There are vast capital machinery in place entwined with giant military fleets, tax collectors, fiat currency and billions of democratically elected positions of power. That shit has a lot of inertia and the concepts are so interdependent on one another that you can't just slot out 'US dollars' and drop in 'bitcoin'. Farmers and soldiers don't give two shits about your blog posts.
If you want to change the world you will have to deal with... the world.
The problem with bitcoin or tech or Christianity or any other kind of ideological zealotry is that you're basically putting on blinders and ignoring the world because you're so convinced that what you're doing is the only thing that matters.
"The rest of the world doesn't matter because it will all change so drastically that I don't need to know anything about it!"
Again, there is nothing wrong with bitcoin, tech, or Christians... Just zeal applied to grand narratives.
Getting my drift yet, dude?
Anyway - we're done here. I made a claim and presented an argument. You chastised that claim without reading the argument or even addressing the summarised version I just wrote for you. I am willing to listen to a counter-argument and consider it, but you refuse to provide one. So this is a waste of both our time.
I don't get how you can behave this way and yet accuse me of behaving like a religious zealot. Refusing to actually address an argument for a claim, while at the same time attacking that claim feels a lot like all the of the conversations I've had with zealots myself.
It's fine to experiment but when Bitcoin became more mainstream the kind of stupid mistakes MtGox has made are inexcusable. Ordinary people were using it and are losing money now. You can't promote a new technology and push for it's adoption by a wide audience and just call it an experiment when it fails. That's reckless.
>> Heather might want to consider switching to a discipline in which experiments are even possible...
And you're complaining about condescension?
Why is that so hard to understand?
As for my last statement - I accept it comes off as no better. But I happen to actually mean it with more sincerity than you can possibly imagine. I was a PhD student in philosophy. After five years I quit because I couldn't stomach my own bullshit any more. I'm currently training myself in math, machine learning and programming. Even as a mediocre tech guy (and I don't doubt I'll ever be more than mediocre) - I'll add more value to the world than I ever did as a philosopher. I believe the same of economics.
The thing that troubles me most about economics is its apparent inability to address the fact that it cannot (yet?) make even modestly accurate predictions, and seems to be in denial about the implications of that fact.
To be honest, I lost all interest in economics-as-science when I learned that its theories were based on the idea that people were "rational actors" - this so flies in the face of my life experience that it simply doesn't pass the smell test.
I wouldn't throw the /whole/ thing out, but we have to be realistic about its limitations, and the fact that small changes in human sentiment or worldview may potentially completely invalidate its core assumptions.
EDIT: Speaking of economic models and confirmation:
https://news.ycombinator.com/item?id=6867999
Also, a careful examination of the bitcoin chart reveals that it does not look like the traditional bubble (yet). Go to http://bitcoinity.org/markets and set it to 2 years and log scale (hidden control in upper left of the graph). The chart, rather, looks like this: https://duckduckgo.com/traffic.html Which is a web platform growth curve.
I get that MtGox made a lot of obviously severe errors in implementation. But I'm also aware that popular wisdom has been (for some time) to avoid it. And further, it should be immediately obvious to anybody with a shred of sense that you do not hand over piles of cash (which is the closest approximation to Bitcoin) to an unregulated, opaque private enterprise.
Yeah, it sucks for the people who lost money. But with the exception of a minority, they were obviously dabbling with things they did not understand.
Nothing about this speaks at all to the long-term viability of Bitcoin as a currency. In fact, I think it'll probably be a benefit in the long-term - there needed to be a large, damaging demonstration of the requirement for security, and this event will cause a lot of changes.
Insert "economic theory" instead of "product".
More significantly, the line "While we may dislike the government’s regulation and intervention into financial markets, their oversight prevents moral hazard and rampant fraud." is just laugh-out-loud funny - we've seen PLENTY of moral hazard and rampant fraud in orthodox financial markets, on a scale which is simply mind-boggling in comparison to anything happening at Mt.Gox.
...the efficient market hypothesis (that free markets will regulate themselves)...
Fiat currencies (money) are pegged to real assets...
...it is as vulnerable to financial crises as any deregulated financial market... US subprime mortgage market, bubbles follow the same patterns for growth and implosion.
Most amusing is the idea that unlike USD, BTC has no protection against fraud. The same is true for most "regulated" transactions, credit card payments being a notable exception.
Laughing at someone's tragic folly is called comedy.
Not knowing the difference between misery and folly is fucking hilarious.
I'd respond with more venom about your tone, but I hate feeding trolls.
Stock in a shell company also has zero inherent value. This is simply a localised critique of the "most valueless asset" accusation - many assets share that characteristic.
Government-backed fiat has some intrinsic value - it can cancel tax obligations and thereby has a captive source of demand (taxpayers). But practically speaking, yes, most of any fiat currency's value is in its seignorage, not tax-cancelling intrinsic value.
Fiat, both from the original Latin, and in practice, means "it shall be".
In the case of money, it means that the token has no intrinsic value, and is not directly convertible into a backing resource with value. Its only value is that given to it by decree of the issuer. There is no component of government compulsion in the definition.
In practice, some fiat monies are the only accepted legal tender currencies for some purposes (e.g. taxes) but it is not a requirement.
A successful fiat currency implies that there is acceptance among users in its fiat value, and some of the most historically effective ways to get people to go along with your assertions boil down to making ultimatums backed up with sharp sticks.
How "protected" did their money turn out to be?
http://en.wikipedia.org/wiki/2012%E2%80%9313_Cypriot_financi...
And weren't a lot of the people who were hit by the levy on deposits actually non-Cypriots using Cypriot banks as tax havens?
Re. non-Cypriots, I'm sure that you're right - but the subject was the state's management of its currency, regardless of who owns it. One thing that your example does flush out though is that fiat currency can be crippled by speculation too - and at least Bitcoin does not conflate a currency and a tax regime.
I'm not a cheerleader for Bitcoin specifically, I'm just really, really sceptical about the robustness of traditional currency.
Details and semantics aside, my point was that the security that governments allegedly bring to currency, and which Bitcoin allegedly lacks, is often much less concrete than we would wish.
[1] http://www.theguardian.com/commentisfree/2014/feb/24/christi...
Value is a human invention, there's really no objective value for something other than what other people demand. The only real difference between bitcoin, fiat currency, and other assets, is that some assets have multiple demand uses -- they supply value for things other than as a currency, and US government assets simply have the way of a much larger, mature, 200 year old institution, with hundreds of millions of people backing it.
Here's the thing: If you are wronged by a crook on the stock market, or by the US government, there is a non-zero chance you can get justice through the courts. But if Mt Gox or Silk Road 2.0 runs off with your money, who has jurisdiction? Who you gonna sue?
The original article makes a lot of mistakes with regards to how bitcoins work, but that's counterbalanced by the hyperinflation/currency debasement hysteria of gold nuts and anarcho-libertarians who think BitCoin is somehow going to end the Fed and restore a pre-1920's Nirvana that never existed.
And as for Mt Gox: Well, what if Toyota runs off with your money, who has jurisdiction? Who you gonna sue? May I suggest Japan's courts and Toyota? What does that even have to do with bitcoin? If you do business with someone you don't know, that may be risky, whether you give them dollar bills or bitcoin, and if you do business with someone you can identify in real life, some country will probably have jurisdiction over them and you can sue them there, no matter whether they stole your dollars, your bitcoins, or your car.
I can't redeem my fiat currency for gold bars, but I can and must pay taxes for it, and that creates a demand floor. It means there will always be someone willing to trade dollars for something so that they can pay their taxes.
As for needing dollars to pay taxes: That doesn't really make much sense, does it? If people didn't want to use it for anything but for paying taxes, how much taxes would they have to pay? If noone wants to actually have dollars, its market value would be zero, so if you measure the income that you want to tax in dollars, it would also be zero, and any percentage of that would still be zero, and so you would not have to pay any taxes at all, and thus would not need any dollars at all in order to pay them (and the government wouldn't even care, as dollars that noone wants to exchange for goods and services are completely useless for the government to have, so why collect them). The only way for the government to actually force the creation of a demand floor would be to force people to sell certain goods and services at government-mandated prices - in which case what you need in order to pay your taxes ultimately are those goods and services and not dollars.
As long as taxes are collected other than based on just income in the form of dollars, just as much (or possibly, quite a bit more in real terms) as if they wanted dollars for everything else as well as paying taxes.
> If noone wants to actually have dollars, its market value would be zero, so if you measure the income that you want to tax in dollars, it would also be zero
Wrong, if the market value of dollars was near zero, and you have a tax system that has taxes other than on cash income (e.g., ad valorem property taxes, income taxes that include as income the cash value of non-cash goods and services received in place of cash income, etc.) but demands taxes in dollars, than the tax in dollars will be very large numbers, which will require you to acquire very large numbers of dollars to pay. (If the value of dollars was actually zero, the tax would be infinite, but then, the value of dollars won't actually be zero, because as the value of dollars declines, the number of them needed to meet tax obligations increases, which shores up the value.)
edit: forget that, you are right, of course - I guess it's not a good idea to treat infinity as a number ;-)
It means the government will do it's best to ensure the value of its currency, the failure of which would be an existential threat to its existence. I believe many people consider this low risk, that they consider the likelihood of the government failing as much less likely than a particular company or commodity failing. (Of course that depends on the government.)
Perhaps nearly as importantly than considering it low risk in an absolute sense, they consider the risk of it with particular government currencies as being strongly correlated to the risk of money, regardless of its type, losing its utility.
If the US government loses the ability to protect the dollar so rapidly that holders don't have a viable exit to alternative currencies, that probably involves a pretty fundamental breakdown in society (particularly for people located in and around the US.)
Really, I think what you are saying boils down to "stuff that can have a big impact on society tends to be watched more closely by the government, and it's more likely that the government will interfere to maintain the status quo" - which is a valid point, but it's neither a particularly special thing with money, nor is there any guarantee that it's always to the benefit of the governed.
Just like BTC.
That's funny it seems that this economist thinks fiat money can't never be valueless. Well, look Cyprus, and look Ukraine now. I am not saying Bitcoin won't never be valueless, but apparently fiat money is not completely invulnerable.
The examples you give, are not examples where just fiat money fails. They're examples of the entire architecture of a society falling apart (the government is being overthrown in the Ukraine, post WW1 Germany was in the midst of a massive recession). These are all situations where no currency retains a stable value since no currency allows you to eat, fuel vehicles or defend yourself. In those situations, Bitcoin is as valueless as anything else (more so, by virtue of being unusable without the internet).
These are all situations where no currency retains a
stable value since no currency allows you to eat, fuel
vehicles or defend yourself.
Seems to me there's nothing stopping Bitcoin fulfilling that requirement.
The currency in use in Cyprus is the Euro - the problem with Cyprus was their dodgy banks not the currency itself.
Bitcoin on the other hand, by design, has NO backing, if the system tank, you wont be able to get anything out of it.
Thus she's correct on that point, whether or not it's important.
As far as I know (and I'm aware I don't that much), a bankruptcy means zero value left for the (ante-bankruptcy) owners. Whoever steps in has to (only) put in some value, like the government paying/writing off unsolvable debts, or the next owner that has to effectively buy the bankrupt entity from the government. Am I wrong?
Therein lies the trouble with taking lessons from economists who don't think it through.
Also previously:
* http://www.wired.com/magazine/2011/11/mf_bitcoin/
* http://www.forbes.com/sites/timworstall/2011/06/20/so-thats-...
* http://money.cnn.com/2013/04/12/investing/bitcoin-bubble/
Don't get your hopes up just yet.
My personal take is that : there are two kinds of people. Some need a Central authority. (They probably respect and believed everything uttered by their parents and teachers as children, too. I'd LOVE it if someone did a psychological study of such correlations in personal beliefs.) Others are suspicious of the utility of government. One need not be a full-blown anarcho-capitalist or whatever the well-read cool kids call it; it's just that the 2008 financial crisis has left a deeply unsettling feeling about whether governments are serving the common man. Such people would rather trust a computer science researcher's invention. I'm definitely in the 2nd camp.
I think the lack of central authority is what type 1 people find unsettling and unbelievable about Bitcoin. What the world needs is a "Cartoon guide to cryptocurrencies" book or video.
Most people can understand government fiscal policy (to a useful extent anyway). Very few can understand an algorithm even when it's explained to them. They vote in the government and currency in it's current form (e.g. USD) has worked for generations. Trusting the government seems much safer.
Also with Bitcoin you are trusting more than an algorithm. You're trusting exchanges. You're trusting in the security of a digital system that can be hacked and you don't understand how to secure properly. With physical currency security is simple and understandable. With digital currency it's not.
As for voting...
Do you know what people trust more than anything else? Other people. Trust in government feels so fundamental, but actually it is based on the fact that OTHER people trust the government, too. People trust a lot many things they don't understand, too. People trust https, for example. They feel safe because "everybody else is trusting it, too".
IMHO, this kind of normative ethics ("it is correct because everyone else says so") is why many societies have totally acceptable behaviours which are obviously wrong to outsiders : whipping women if they dare to drive in Saudi Arabia, ignoring abject poverty as it stares you in the eye in India (or even the West), punishing non-religious or sexually "deviant", etc;
Coming back to BitCoin : the burgeoning community that believes in BTC has the potential to reach critical mass and create the kind of numbers that will serve as a foundation for the kind of trust that the government, for example, or religion (despite being provably nonsensical), enjoys today.
TL;DR : it's not that people trust the government, they trust what other people trust. A good enough number of people trust BitCoin.
The government, obviously. They have the guns and can simply use those guns to annex the necessary mathematicians, should the need arise.
Far too often, people seem to forget that governments are the one that has the monopoly on use of force. Thinks like "logic" and "rhetoric" and "math" don't mean a damn thing when the conflict has been reduced down to basic natural selection.
We, as a species, are incredibly talented at postponing that conflict. We pile on more and more layers of indirection - such as "politics", "police", "lawyers" - hoping to avoid the violent battle that lies at the core of any real disagreement.
Unfortunately, geeks tend to fall prey to the "just-world fallacy" in these cases. We're used to the rigor and determinism of math and logic, and often assume that such concepts are universal.
You clearly have a definition of 'trust' that differs significantly from my own :)
Guess what is common to the guerrilla soldiers in Vietnam, terrorists spread across the world, the hackers group Anonymous, and other trouble-makers whom the big bad government seems to fight and never win against : they're decentralized.
Also, there's not much use pointing a gun at a mathematician a) after they've published the result and b) who can successfully publish his stuff anonymously (Satoshi)
> Unfortunately, geeks tend to fall prey to the "just-world fallacy" in these cases. We're used to the rigor and determinism of math and logic, and often assume that such concepts are universal.
Not at all. Diffie-Helman key exchange, for example, solves the problem of exchanging a secret key on an untrusted connection. It is exactly this kind of "there WILL be bad people; how do we make it work nevertheless" thinking that gave birth so many interesting results in cryptography that is going into the creation of new currencies, too.
Centralized government has had so much history of working well + there are not that many non-centralized protocols at work in real life yet (p2p, bittorrent, distributed consensus protocols like Plaxo, Raft, etc; are the only ones I know, for example) so you may be finding it difficult to believe in a decentralized protocol, that's all?
Hint: Bitcoin was created for the sole purpose of avoiding problems of that nature.
As for the rest of the article, not much content and many unsupported assertions. It would have been nice to hear why bitcoin is completely value-less, beyond not being "goverment backed". But I suppose that discussion would involve actually understanding bitcoin.
Not to mention it's already reached critical mass which means it will never go away and the advantages outweigh the risks.
Now will this hurt bitcoin? Yes. Is this a good thing in the long run? Definitely.
It's always a bad thing when 70% of all speculation is done on one platform and that platform closes down.
I'm somewhat glad mtgox was allowed to fail that juts proves that the awful too big to fail mentality of the US did not corrupt the bitcoin marketplace.
This is a good thing in the long run even if it's going to hurt like hell in the short run.
I tried using them once and they were asking to many unnecessary questions so i just went elsewhere.
If you don't understand anything about something but need to opine, put the words "lesson" and "engineer" in the head to fake your understanding.
Madam, there is nothing in your article that any of the engineers who were (and are) so excited by bitcoin didn't already know long before you'd even heard of bitcoin.
Does the author have some insider information on Egyptian currency trading? I hope they are putting their money where their mouth is by selling EGP on the foreign exchanges!
Or in other words, the author opens this article by spouting speculative bullshit. Why then should we treat the rest of it as useful?
Bitcoin mining is not valuable for anything other than creating Bitcoins
The bitcoin protocol has quite a lot of potential uses (see master coin and colored coins), even if actual bitcoins were worth nothing monetarily.
But you have hit on an important point, because throughout history almost every empire bankrupted itself at one point or another when it made a big find of gold, and quickly mined and spent a lot of it presuming it was rich...and instead, tanked its currency valuations and found itself much worse off because not only had they inflated the hell out of their currency, they'd not adjusted any of their tax rates to match.
Off-topic, but considered interesting: Am I the only one that finds it frustrating that Subtle blogs have no local comments? I find it diminishes the value of the text in itself.
I don't know what the eventual value of Bitcoin will be, but this economist doesn't, either...
Assumptions...
Here are the real three lessons we have learned the hard way.
#1 My money stays in my wallet. All the time.
#2 If not possible #1, know the names of those who keep your money, you're trusting them, they should be held accountable and strongly punished by law to set a precedent. Do not trust your money to a faceless business.
#3 Cryptomoney is the future, spend more in research, protect wallets, methods to test solvency, public audits, webs of trust, etc.
This tragically had to happen so we could learn these lessons. Monetary darwinism at its best.
We will raise from the ashes stronger, Spartans.
A few too many mixed metaphors in this article! I'm trying to imagine herds of people jumping on a bandwagon...
What is a bandwagon anyway, I realise now I've never known - it's only ever used in the phrase/cliche "jumping on the bandwagon".