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Why Do Economists Hate Bitcoin?

It started as a simple request. Would my old favorite economics teacher be willing to sit down and discuss Bitcoin with me? A quick chat where I could hash out some ideas that had been going through my head is what I had in mind.

No such luck.

“I am not interested in talking about bit coin. After its market collapse this week, the arrest of one of its directors for facilitating money laundering, the disappearance of thousands of bit coin in what looks like continued shady deals, and the disappearance of one of its directors this week in light of the vanishing bit coin …. I don’t think there is much to credibly say about it as a store of real value.”

So much for that.

To be fair though, I could’ve picked a better week to try and start a conversation. The Mt. Gox debacle has left the community shaken with plenty of talk in the news about the death of the young technology. Of course, this is also nothing we haven’t seen before.

Nonetheless the interaction left me disappointed. Whether or not Bitcoin succeeds is not something that should be very important to economists. They should be fascinated by the fact that this system exists at all.

Economics depends on having a definition of what money is. That has been easy for the past hundred years because money has been a pretty simple tool. It has been issued and its value enforced by a sovereign nation, usually in the form of paper notes or coins. The internet changed things a little bit by allowing for electronic transfer of physical currency, but the system is still based around a central government.

Bitcoin has changed all that. Here is an excerpt from JP Morgan’s research piece The Audacity of Bitcoin:

“Therein lies bitcoin’s limitation: with due apology to anarchists, there is no common power like a government to compel the public to use bitcoin as universally as its own fiat currency. Recall that currencies don’t become widely used spontaneously or through a grassroots campaign. They become widely used nationally because a government declares them legal tender, and they become widely used internationally because they are legal tender in a significant economic area with large, unrestricted capital markets…In the area of transactional demand for a currency, incumbency is an incredibly high hurdle to jump.”

And yet Bitcoin has jumped that hurdle. For some reason, without any sort of coercion, millions of people world-wide are deciding to pay for and provide their goods and services with the cryptocurrency. Economists are focusing on the fact that it is not already a perfectly formed currency while ignoring the development that the by-product of a computer program released 5 years ago can now be used to buy Persian Rugs on Overstock.com simply because people have agreed that it has value.

JP Morgan is right, currencies have not historically become widely used through grassroots campaigns. But that is what is going on.

Meanwhile the economics community at large is disregarding this amazing development (there are exceptions, check out this great article from Stanford). They have chosen to ignore what can at the very least be described as an awesome social experiment in economics and the meaning of money by choosing not to educate themselves about the most basic details of the system.

This is exemplified by my teacher, the most brilliant economist I’ve had the pleasure of meeting, not doing enough research to know that Bitcoin has no “directors”.

Why is this?

The answer lies in a fear of change. If Bitcoin does succeed in becoming a worldwide phenomenon it will flip economics on its head. Keynesianism, the basis of modern economics, places the actions of a central bank at the forefront of its model. Bitcoin removes the duty of a central bank.

That is why you see the closest thing to a rock star that economics has to offer in Paul Krugman coming out with an article entitled Bitcoin Is Evil in which he attacks the Libertarian slant of the technology. Or why Yale economist Robert Shiller dismissed Bitcoin as a “bubble” and said he is “amazed by how people are so excited about it”. Instead of embracing a cool new development in the world of economics they attack it because it doesn’t sit with the assumptions they have built their careers around as scientists.

And that’s bad science.

These are people who recognize that their chosen area of study has problems. Shiller predicted the recent crash and Krugman argued in 2008 that much of the past 30 years of macroeconomics was “spectacularly useless at best, and positively harmful at worst“. My old teacher once agreed with my statement that the profession seems like it needs a revolution.

So why not look at this organic, world-wide, economy that is rewriting the history of money before our eyes and admit that something important is happening?

It’s simple. Change is scary. No one wants to see their life’s work relegated to the dustbin of history.

But in the end it won’t matter. The world will move on with or without the permission of Nobel laureate economists. One can only hope that these brilliant minds let go of their fear and take some time to appreciate a fascinating development in their field as it happens.

By

Kenny has a degree in Political Science and Economics from Western Washington University. He enjoys talking economics, sports, music, and politics. You can reach him on Twitter @kaspotz.

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  • Common Sensimelia

    For the same reason record companies hated the internet before they understood it.

  • http://www.economicsofbitcoin.com/ Peter Šurda

    Bitcoin exposes a lot of fallacies in the assumptions (implicit or explicit) that economists make. The function of media of exchange, the function of money, the conflict between the goals of banks (commercial and central) and the “consumers” of our monetary system, and so on. This causes cognitive dissonance. People do not like to confront the idea that they have been wrong for years. But ultimately, as the author said himself, their opinion is irrelevant.

  • Brian

    Bitcoin doesn’t flip economics on its head. Its pretty “old-school” in concept. Its just going back to the Gold Standard but this time enabling people to actually utilize their gold as currency over the internet. Fiat is what flips economics on its head.

    • Jake

      The programmability of bitcoin and the mass adoption by automated networks vastly improves upon the gold standard.

  • Joshua

    Great read. Would bitcoin or any other cryptocurrency work without the baking of a central bank run currency? It would be neat to see one work in a no growth economic model that was not backed by a central bank currency.

  • Tony

    Most industries hate disruption and bitcoin is higly disruptive.

  • Allan GorgeousAl Boreham

    The majority of economists are of both a certain age and a certain personality. Neither of these factors lend themselves favorably to either understanding a new technology from day 1 nor having the vision to understand where it can go.
    Add to this Bitcoin is accepting a way of doing things that goes against everything they have been taught as ‘the right way’ for the majority of their lives.
    Economics is pretty much just history, but of finance??
    With so many of these brilliant conomists around it’s many a wonder why so many countries of the world are in Biliions and Billions of FIAT debt???

  • David Pinkerton

    I agree with your sentiments but I would like you to work on the making your articles easier to read. Some of your sentences are convoluted. (E.g., “Whether or not Bitcoin succeeds is not something that should be very important to economists.” And then you go on to say that economists should find it fascinating. You lost me part of the way along.) Can you get a friend to proof read your articles first?

  • Jean Neuss

    Spot on! I’ve been arguing in a similar direction as well for a long time: even if the long-term success of Bitcoin is perhaps still doubtful (governments could ban it, a fatal technical flaw could be exposed, or maybe just a better “Bitcoin v2″ comes along and replaces the current Blockchain), it is *the* most interesting global financial and social experiment of the decade, if not century — probably second only to the advent of the Internet itself — regardless of whether it will take over the world or stay in a niche forever.

    To ignore it by callously dismissing it as a “Ponzi”, to put so little effort into understanding it as to talk about “Bitcoin CEOs” or “directors” is such an intellectually lazy thing to do that it would be enough for me to drastically revise my valuation of someones academic credibility.

    On the bitcointalk forum I’m in regular discussions with a well-known Brazilian computer science professor: he is extremely skeptical about Bitcoin’s success (and publicly states he doesn’t own any) but at the very least he is interested, curious and intellectually flexible enough to learn about the details of Bitcoin before drawing his conclusions. I wish more established academics would do the same.

  • Corey Bordes

    Economists are not scientists.

  • devobtch

    economists like fiat because they can control it
    they don’t like BTC because there is no way they
    can control it

  • pj234234234232342423423422

    Paul Krugman – “Bitcoin is Evil” – need more be said?! Obviously Bitcoin must be good if Krugman doesn’t like it!

  • alan

    actually money has historically come about as part of grassroots and not at all by government fiat. the fiat comes later, the Austrians (mises and Roth bard in particular) have proved the case beyond a doubt. see “what has government done to our money” and “human action”.

  • Andres

    I’ve been saying for a while that Satoshi Nakamoto, et al. should win the Nobel prize in economics. It is a brilliant invention, in mathematics, computer science, economics, social advancement and freedom. I would also argue for the Nobel Peace Prize, but given the previous winners, it seems like a devalued (and possibly embarrassing) prize to win. Bitcoin certainly beats writing articles about economics for the NYT.

  • vongoh

    The truth is: The less that these people that are have invested their careers in, are propping up, and are profiting from the current fiat currency / fractional reserve / central bank controlled money system understand the true extent of disruptive nature of cryptocurrencies … the better.

    That way when it passes the tipping point Krugman, JP Morgan, Goldman-Sachs, and all of the other parasitic architects of this parasitic system will never know what hit them.

  • irv

    It’s not just that change is scary. It’s hard. When you’ve spent years believing a certain thing is true, you tend not to even pay much attention when someone comes along and tells you it’s not true. Bitcoin is a disruptive technology. Part of the definition of disruptive technology is that it goes against the accepted paradigms but works anyway. Of course the old guard are against it. they don’t know how not to be.

  • http://yukujau.com/ matthew

    This is why i primarily love Bitcoin, i mean the technology itself is amazing dont get me wrong but if it does in fact work out all these sought after opinionated economists will be spat on!

  • ciaranmurray

    Mainstream economists simply haven’t grasped what Bitcoin can do yet. 90% of articles written on it, analyse its ability to perform as a global reserve currency, yet ignore the myriad of other uses Bitcoin has. A global reserve currency is the last thing Bitcoin will become.

  • Janek

    Now that WAS a worthwhile read. Thank you! expect some doge rain shortly.

  • Shybiker

    Brilliant article. The Old Guard never embraces new developments. The current head-in-the-sand attitude of mainstream economists reminds me of how journalists and old media felt twenty years ago about digital media. Ignoring the future and clinging to the past doesn’t stop change.