Topic: Mainstream Economics, Bitcoin, and Cunicula's crystal ball (Read 2210 times)

Maybe you can get Krugman to parrot some of this masturbation for you. It is all theoretical horseshit. Got piles of it back in Idaho.

When the pedal hits the metal, Bitcoin is a pyramid scheme.

http://en.wikipedia.org/wiki/Temple_of_Juno_Moneta

It's easy to confuse past performance with future expectations.  Our economic system does so all the time.  But I don't think money is simply a record of the past.  It's a prediction of the future.

I've been thinking about this a bit, lately.  The Romans had a basically steady-state economy, powered by renewable energy.  It failed when they used some shady financing, monetary debasement, and military adventurism to turn their economy into a ponzi scheme.  But did it really fail?  Did the Romans end up worse off because of this?  The assumption is yes.  But it's kind of an open question.

How do you measure one's monetary worth in a steady-state economy?  Easy, right?  Past performance is a good indicator of future expectations.  I like to think this, in some way, may have had some connection to the Roman rituals of burnt offering performed at their temples.  Their economy was agrarian, based on the collection of solar energy and its conversion into grains, animals and oils.  In real economic terms, sacrificing a small portion of this harvest didn't have much negative impact on the economy.  But the information it conveyed, in terms of proving productive ability, and therefore predicting future production, would have been invaluable.

That's all well and good.  It worked well, for a long time.  But the assumption that past performance equals future expectations breaks, when the economy grows outside its previous bounds, as the Roman economy inevitably did.  Economic performance is inflated by the addition of new resources.  This creates the expectation of continued growth.  Growth doesn't last forever.  Eventually reality catches up.  Boom.  Past performance no longer equals future expectations.  In the Roman example, this process was accelerated, because they manipulated their system, and forced growth when it was not natural.

How does Bitcoin measure monetary worth?  It's interesting that there is this hybridization.  During the growth phase, this ostentatious display of wealth, mining with wasted electricity, performs the function of proving past performance.  But at the same time, Bitcoin's value is increasingly based on the collective future predictions of all the people gambling on its price.  Past performance is used to bootstrap the system, but accurate future expectations are what transforms Bitcoin into real money.

At the same time, each new entrant into the Bitcoin economy invariably goes through this transformation, this ritual of sorts.  They start out mining, wasting electricity and resources in a contrived, zero-sum game.  Only to eventually recognize that past performance, ostentatious displays of wealth, doesn't necessarily predict future expectations.  Mining doesn't necessarily pay off.  There is a much more powerful force at work.  This force is the collective will of the market, guiding the economy via millions of individual decisions, collectively forming an accurate prediction of future expectations in a way that no individual ever could.

So, I guess what I'm saying is, don't assume that money is a record of the past.  That view will hurt us when we inevitably grow beyond our current boundaries.  Money is a prediction of the future.  Bitcoin is a well-designed system for enabling this type of money to emerge, naturally and organically.  Don't try to force it.  Just watch it happen.

In October 2012, I suggested two mainstream monetary theories that could justify bitcoin's use as a currency.
I thought these theories should go into the economics section of the bitcoin wikipedia article.

https://bitcointalksearch.org/topic/m.1308459

1) "On money as a medium of exchange" by Nobuhiro Kiyotaki and Randall Wright

2) "Money is memory" by Narayana Kocherlakota


Since then two economics papers have come out that attempt to explain bitcoin's emergence as a currency (I'm not aware of any others):

"Bitcoin is memory"
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2275730
This June 2013 paper uses Kocherlakota's framework, see (2).

"Bitcoin: A search-theoretic approach"
http://www.eco.nihon-u.ac.jp/center/economic/publication/pdf/13-01.pdf
This May 2013 paper uses Kiyotaki and Wright's framework, see (1).

Comment:
Neither of these papers is going to make much of an impact. These authors are building on mainstream theories, but are not noteworthy monetary economists.
It is encouraging though that some people low down in the hierarchy are testing the waters. (To give you an idea of how hierarchical the field is, a common term for these people is 'low-ranked monkeys.') Interestingly, only 'low-ranked monkeys' have strong incentives to take risks in their research. If they are successful, then others may imitate them.

Monetary theory is hard and to make an impact you really need to be very talented (e.g. Kocherlakota entered Princeton at 15).
If someone like Kocherlakota, Kiyotaki, Wright, Bernanke etc. wrote a paper on bitcoin, this would legitimize economic studies of bitcoin and spark further analysis among the really talented, influential guys. If bitcoin has enough staying power, this will come to pass. For the time being though, expect more corn pone opinions from the mass of economists.