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.