You know what I would like? I would like Paul Krugman to call me
right now on video. I would talk him through how to download a
cryptocurrency wallet. Then he could hold up his phone. I would
scan the QR code for his public address. I would send him a token
of his choosing.
He would see and experience how this works. He might still hate
it, as he has and does now, but at least he would have skin in the
game and experience the reality of a modernized money and payment
system, instead of writing silly things about it.
The Shift
The twittersphere devoted to Bitcoin and the like has been
blowing up about Krugman’s latest swipe against Bitcoin. What’s
gone unnoticed is that his position has moved subtly from his
“Bitcoin is Evil” column of
December 28, 2013. He once found the whole thing ridiculous. Now he
finds it unwise and unviable as a monetary system.
That’s a big difference. It’s progress. His current position on
the topic is exactly what one would expect from a Keynesian of his
pedigree, which is to say that he is resolutely opposed to any
money not created and managed by the state, whether gold or
Bitcoin.
The first piece in 2013 was written as the price had touched
$1,000 and had begun to fall. In typing that sentence, I’m
profoundly aware of what an extraordinary price that was for the
time. Earlier in 2013, it had floated around $14, a level it
had touched briefly in 2011 when hardly anyone paid attention to
it. It was easy to dismiss as pure nonsense, and Krugman did
exactly this.
This Isn’t Real
I get it. I did the same back in 2010. It took me two years
finally to come around and realize that not only is cryptocurrency
the real thing; it represents a great innovation. By the time I did
realize it, there still weren’t many mainstream articles out there
on the topic. Most available resources were not written for
economists.
So it was a big deal that Krugman finally weighed in.
“Can this actually work?” he asked in 2013. “I’m still deeply
unconvinced. To be successful, money must be both a medium of
exchange and a reasonably stable store of value… And it remains
completely unclear why BitCoin should be a stable store of
value.”
Now, this requires a bit of tweaking. Ludwig von Mises, in his
definitive 1912 treatise on
money and credit, described the “store of value” function of money
as a secondary feature of the primary utility of money. There are
many sources for storing value; money can be one but this is a use
case, not a test of fundamental functionality.
“As soon as the practice of employing a certain economic good as
a medium of exchange becomes general, people begin to store up this
good in preference to others. In fact, hoarding as a form of
investment plays no great part in our present stage of economic
development, its place having been taken by the purchase of
interest-bearing property.”
In short, the “store of value” use case is a stage in the
evolution of moneyness, not a persistent practice over time. Keep
in mind that Mises wrote this more than 100 years ago. Already,
people had found other ways to store wealth besides stuffing money
in mattresses. And today, the idea that Bitcoin should be judged as
to whether or not it is a store of value, much less a stable one,
is absurd.
The irony deepens when you look at the data on Bitcoin velocity:
it has slowed to a crawl following the crash in price after
December 2017.
Velocity of BTC over its
lifetimeblockchain.info
Plus, Krugman then (and now) entirely bypasses the key monetary
innovation that is cryptocurrency: its peer-to-peer network that
enables final settlement is a built-in part of the monetary unit,
thus making the problems of storage, geography, and trust disappear
entirely. It’s a completely different way of conceptualizing money,
a money and payment system in one.
The value of the token itself traces to its settlement service.
If there were a way to split Bitcoin from its distributed ledger,
it would be destroyed and be useless.
Even if Krugman did not and does not understand this, how do we
get from that to the headline’s claim that “Bitcoin is evil”? Maybe
it was the headline writer who put the fine point on it. But it has
stuck for 5 years. We can conclude from this piece that Krugman
thought the innovation had absolutely no redeeming value and was a
malicious fake.
Then and Now
Today, his views on the technology itself are more nuanced.
Instead of near-frictionless transactions, we have high costs of
doing business, because transferring a Bitcoin or other
cryptocurrency unit requires providing a complete history of past
transactions. Instead of money created by the click of a mouse, we
have money that must be mined — created through resource-intensive
computations…. The high costs — making it expensive to create
a new Bitcoin, or transfer an existing one — are essential to the
project of creating confidence in a decentralized system.
I’m going to pass over that he is completely wrong that using
Bitcoin requires the personal hosting of a full node registering
all transactions. It does not. As for the supposed glories of
“money created by the click of a mouse,” Bitcoin is a scarce
commodity, as money necessarily must be in order to obtain and
sustain its value (if a good is nonscarce, it is necessarily
unpriced absent legislation.)
Krugman’s latest analysis is an exercise in comparative
institutions, which is to say that he now realizes that Bitcoin is
real but now he wants to talk about it as a monetary system. He
likes fiat money more because it costs much less to print paper
than to mine cryptocurrency.
To be sure, “Governments have occasionally abused the privilege
of creating fiat money,” he writes, “but for the most part
governments and central banks exercise restraint.”
That’s a heck of a way to dismiss the horrors of inflation that
have led to revolutions, political upheavals, cultural calamities,
and tyrannies for ages and ages. The amount of human suffering
caused by central bank control plus paper money is immense. And
even when obvious disaster hasn’t been traced to nationalization of
money, there are other effects: unlimited government debt,
uncontrolled spending, vast increases in government power, all made
possible by a “money created by the click of a mouse.”
Digital Gold
Krugman’s subtle shift is from “it can’t work” to “this is not
as good as central banking and fiat money.”
I count this as progress. His negative outlook toward
cryptocurrency is exactly what we would expect from a theorist
schooled in Keynesianism. Keynes despised the gold standard because
of its resources costs, the limits its places on political dreams,
and the way it keeps reality in check. Bitcoin is nowhere even
close to being a competitor as a money and yet he attacks it for
the very same reason that Keynes attacked gold.
We sometimes see arguments between supporters of gold vs crypto.
My debate with Peter Schiff is an
example. But as this Krugman column shows, from the point of view
of economic theory, the real division will always be between those
who support sound money and those who want full government control
of money, which is to say unsound money.
For now, this technology need not be judged based on some
imagined future in which it fully replaces national money. I don’t
believe we’ll see that in our lifetime. Right now the question
should be: does it serve a useful purpose as judged by the
market?
Meanwhile, my offer stands. If Paul Krugman wants to experience
what a modernized P2P exchange of sound money feels like, my offer
stands. I’m willing to help.