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Krugman’s Three Money Pits

One might cut Paul Krugman a bit of slack for his sorry tale of three money pits, as twice a week he faces the challenge of coming up with an economics column with some manner of hook. Unfortunately, with great prizes (and compensation) comes great responsibility, especially when an academic knowingly exploits fallacies to advance a political agenda.

For its users, money has three classic functions: a medium of exchange, a unit of account, and a store of value. For its government producers, money has three other functions: a source of seignorage, a means of taxation, and a lever of macroeconomic influence. Theses various purposes can sometimes conflict, so tension arises when a monetary innovation appears that better serves some stakeholders than others. As a devout Keynesian, Krugman has the ongoing mission of defending government fiat currencies against all alternatives, whether modern digital or traditional commodity-backed currencies, using any means necessary, not limited to the intellectually honest.

Krugman’s Three Money Pits are 1) the open-pit gold mine in Porgera, Papua New Guinea, 2) the bitcoin mine in Reykjanesbaer, Iceland, and 3) a hypothetical money pit from Keynes’ head. Porgera’s mine is a litany of human-rights horrors, and Krugman implies that gold consumers are somehow to blame. Porgera is really just one example of the resource curse, which applies to numerous countries rich in natural resources but short on democratic institutions. If Krugman drives a car, is he similarly troubled by the provenance of his fuel, the rubber in his tires, or the elements (platinum, palladium, and rhodium) in his catalytic converter? If Krugman laments “burning up resources”, what consumption does he consider to be non-frivolous? Flying to Europe, as he is wont to do, consumes a great deal of resources, not to mention producing a great deal of pollution. If Krugman dislikes commodity-backed currencies and trading with developing nations, one might expect him to enthusiastically support the bitcoin server farms in Iceland: here is a Scandinavian country using renewable resources to produce money out of thin air! Even better, if bitcoin has an intrinsic value, it is as a medium of transferring value globally with almost no transaction costs, an incredible boon to the citizens of developing countries who work in developed nations and currently pay 10% commissions to send home remittances. But no—Krugman reveals his value preferences: a currency not under the control of government and banks is a threat, regardless of its other benefits. A non-arbitrary supply might be the only thing that gold and bitcoin have in common, but for Krugman that is all that matters. His framing of gold and bitcoin as violating human rights and despoiling the environment is designed to arouse emotion and bypass reason.

Bitcoin mining does have a cost, but clearly the total cost is less than that of banks, because in the end bitcoin transactions can be made for commissions that are orders of magnitude lower than the 1–10% that is typically charged by banks, PayPal, the credit cards, and Western Union. Krugman ignores the overhead costs of the current monetary and banking systems, which are clearly non-trivial. The massive computing power devoted to bitcoin is dwarfed by that devoted to recreational uses, from multiplayer games to streaming pornography. Perhaps Krugman has an opinion there also.

When he recruits Adam Smith and John Maynard Keynes into the discussion, Krugman makes more appeals to emotion. He describes Adam Smith as a “patron saint” to conservatives, who resist public spending for creating jobs as “anathema”—clearly conservatives are religious and dogmatic about economics. Meanwhile Krugman paints Keynes as a scientist with theories so accepted that resistance to them must be “political”. Last I heard, scholars in the dismal science had by no means reached a consensus about Keynes’ ideas that a national government can spend money, even burying valuables in a pit, and stimulate more value creation than value consumed.

Adam Smith did indeed call for banking regulation, as Krugman points out gleefully while neglecting to mention the context. In the same paragraph of The Wealth of Nations where Smith mentioned the “dead stock” of silver and gold, he described the precariousness of an economy “suspended upon the Daedalian wings of paper money” rather than traveling upon “the solid ground of gold and silver.” Smith promoted not fiat money, but paper money backed by gold and silver. Smith expounded on the dangers and drawbacks of paper money, but bitcoin is not subject to them. To store value bitcoin leaves no “dead stock”, and its value does not depend on the reliability of human beings. Of course, not everyone would agree with the notion of “dead stock”—to a non-Keynesian, storing value is a respectable function, and if money will not do it properly, people will find other value stores, e.g. larger houses than they need for lodging.

Krugman’s funniest statement was his conclusion, disparaging both gold and bitcoin as “a determined march to the days when money meant stuff you could jingle in your purse” and “digging our way back to the 17th century.” This is certainly a novel way to describe a digital currency that is based on 21st-century NSA-approved cryptographic algorithms and that can be transferred instantly and globally via the Internet without bank intermediaries. I fear that Krugman is the one becoming old-fashioned.

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  • Miroslav Vyšný

    Krugman’s prediction from 1998:
    “By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s”
    What more do you need to know about his ability to give a worthwile forecasts?

    • simplulo

      In this column Krugman is not forecasting, but opposing bitcoin and gold as evil. Fortunately his argument is incoherent, e.g. in one breath saying that bitcoins have no intrinsic value, in the next referring to a “dead stock of digits”. Perhaps bitcoin advocates have themselves contributed to the notion that bitcoin and gold have a lot in common by referring to bitcoin as Gold 2.0.

  • simplulo

    The best criticism I got was that my suggested intrinsic value for bitcoin as a value-transfer mechanism should really be categorized under medium of exchange, and this is probably correct. The bitcoin system is a secure protocol that updates a ledger distributed among a network of clients. This confuses four things: the protocol, the network, the ledger, and the stuff being transacted. I wish the protocol had a generic name, to separate it from the particular stuff (bitcoin) and its ledger (the bitcoin block chain). The network is valuable, but no, the bitcoin itself has no intrinsic value: if it were not used as a transport medium, bitcoin, unlike gold, would have no value.

    This suggests a thought experiment: what if this secure network ledger system initially arose to track something real and physical, say land or shares of company stock. Eventually someone would get the idea to use it as a convenient medium of exchange: a person in Austria could convert euros to stock in company X and transfer ownership to someone in Bangladesh, who would then convert the stock to his local currency. The details of company X wouldn’t much matter, just that its shares be liquid and stable in value. In that case, “bitstock” might become commonly used as money, and no one would complain about its lacking intrinsic value.

  • lol

    hi dudes