Bitcoin Decrypted Part III: Social theory aspects



Bitcoin decrypted part three social theory aspects in part three we switch perspectives again toward viewing individual Bitcoin units as tradable monetary objects using the methods of economic theory and historical interpretation only one of Clark's three laws remains the first law when it distinguished but elderly scientists states that something is possible he is almost certainly right when he states that something is impossible he is very probably wrong a number of modern economists and investment advisors have dismissed Bitcoin most often apparently without first gaining much relevant technical understanding some have invoked teachings of the Austrian School of Economics such as Mises regression theorem of the origin of money and the frequent use of the word commodity and the monetary writings of Karl Mayr Murray Rothbard and others I do not think these are the best interpretations but they are understandable in general in the traditional Pro hard money anti-inflation a– story there were precious metals which were good fixed-rate or fully backed money substitutes which were okay partially backed so-called fiduciary media which were quite controversial and problematic and finally fiat money which is just horrible this account of the trend of monetary decline seems to move in stages from a direct grounding and a tangible substance followed by different stages of indirect to grounding in such a substance followed eventually by no grounding at all and into this model arrives Bitcoin nothing it has no physical substance it is not a commodity money it does not substitute at a fixed rate for anything else it is not a money substitute and it has never been to create an official monetary unit it is not fiat money so what is it if our yardstick for quality is degree of grounding and a tangible substance then it would naturally seem as though Bitcoin was even worse than fiat money I think this whole line of reasoning has taken a wrong turn somewhere and that the arrival of Bitcoin now forces us to sort this out in what follows I will suggest several approaches to this interpretive challenge some new and several more than a hundred years old the first thing to consider is whether the most important axis of change in the hard money story was really the degree of linkage to a material substance after all the actual advantage seen in this linkage was having an objective basis for preventing the arbitrary inflation of the money supply another way to interpret this progression puts it in a different light this is to consider the degree to which the use of a given type of monetary object rests on legal status and administrative enforcement versus the degree to which it is adopted freely and could be used by market participants without any such status or enforcement professor gido huisman in the ethics of money production uses the term natural money's and forced monies to label this type of distinction another theoretical model I have found useful for thinking about bitcoin is the unit system duality concept from integral theory a common critique of Bitcoin is that its units do not have any value when considered all by themselves in contrast it is easy to hold up a metallic coin and think that it does have some such value all by itself however the Austrian school has always emphasized that an economic good only has value in the eyes of acting people value the characteristic only results from valuing the verb likewise any monetary object can only function to the extent that users accepted in that role in a given context it's part of a network to members of an imaginary hunter-gatherer tribe who considered shiny metals a curse rather than a blessing such coins would not be viewed as economic good but as economic Bad's leading them to engage in a practice one might call driving out bad money the point is that value does not reside in objects at all but only in people's situated and contextualized valuations of them in approaching a subject one can shift attention toward either a system or a unit perspective for example in studying the flocking behavior of a certain bird it makes sense to alternate between studying the dynamics of the flock and studying the movements of individual Birds gaining different insights from each viewpoint and the interactions between the two with metallic coin monies the units were more prominent and the technical and social system aspects and context easier to let fade into the background of awareness with Bitcoin the system aspects are more obvious and the actual nature of the units more obscure some Bitcoin promoters have begun claiming that Bitcoin units are not really very important compared to what the system now makes possible however it should be recalled that the system would also be worthless if it did not deliver discrete tradable units as another way to picture this model think of a telephone what if we demanded of telephones that they must have some value all by themselves even when disconnected from the network we could see the problem with this right away Iran too often use the term context dropping which fits here a telephone is a kind of good that only is valuable within the context in which it is valued which is in this case connected to a telephone network telephones like media of exchange are examples of networked goods arguing the Bitcoin ought to have some value outside of the precise context in which it is meaningful seems similar to requiring that a telephone also be useful even when disconnected conversely suggesting that the telephone network is the important thing while telephones don't really matter it doesn't quite work either one of the challenges of money is authenticity and counterfeiting people need to be able to agree that a given specimen really is one of the units that it is supposed to be one person might think the paper he has is a dollar another might discover it is a counterfeit one person might think she has a solid gold bar another might find that it is a gold coated tungsten bar in both cases though there is some basis on which people can agree that a given specimen is or is not a valid example of the unit the key is that it must be possible for many different people to agree that something is or is not a certain way based on some common standard of evidence that anyone can check to get to this precise intended meaning I have come to call this quality inter subjective agree ability this quality extends beyond the issue of counterfeiting to the general public understanding of the nature of units supply specifically how changes to the aggregate stock of a monetary unit come about and how large such changes are likely to be if for example people thought that the volume of a given fiat money would be doubled tomorrow it would change their behavior their behavior does not change this way so long as there is a general public understanding that the basic supply characteristics of the money will not change so suddenly with precious metal coins such understandings were based on fields such as metallurgy coinage and related testing methods these worked to make counterfeiting individual coins and debasing all such coins harder to hide knowledge from these fields helped people identify particular specimens as authentic or not and helped secure the value of all such units in circulation limited by precious metal supplies the same goes for fiat money but in a different way here we understand that counterfeiters will be prosecuted and that central bank committees work to control the aggregate election of new units based on their legislative authority even if one may not agree with these methods they still do form a basis for common perceptions that the quantity of Fiat units is limited and that counterfeiting is suppressed Bitcoin accomplishes these same social functions in an entirely new way what was done with chemistry and metallurgy and later with legislative power and threats is now done with an open-source protocol for a peer-to-peer network engaged in cryptographic verification using proof of work that is the technical pieces outlined in part 2 of this program compared to previous methods Bitcoin appears to have overcome the problem of counterfeiting and it defeats the threat of arbitrary unit inflation by specifying the aggregate stock of units within the definition of what the unit is namely in this case a 21 millionth of the total possible stock of Bitcoin some commentators have invoked the use of the word commodity in Austrian monetary theory as an argument against the legitimacy of Bitcoin in a monetary role but were the Austrian greats using this word mainly to specify goods that were tangible as opposed to intangible war was tangibility more of an incidental aspect of the examples they had in mind at the time consider how carl menger's 1892 paper on the origins of money cited commodity markets such as for cotton and grain as examples in the course of explaining his concept of relative sale ability with most goods he explained buyers and sellers are in quite different positions from one another at one extreme if one wants to buy a special instrument say one can just go to a specialty store and buy it but to turn around and sell it again right away is much harder even if one can sell it at all it will likely take a while to find a buyer and the price will probably have to be much lower in a commodity market however the relative positions buyers and sellers are much more equal there may be a price spread of some basis points but compared to shopping for non commodity items one can either buy or sell at about the current market price just as well in this sense Menger explained money is the most saleable good of all it's price against other Goods tends to be either the same or very similar whether one is buying or selling it in exchange for other goods and services his concept of relative sale ability was central to his account of the market evolution of media of exchange and then money out of commonly traded commodities those Goods easiest to both buy and sell across space and time would tend to be used to mediate or facilitate indirect exchanges that is non barter transactions it is clear in the modern world that intangible digital goods compete with tangible goods everyday smartphone apps substitute for and exceed the capabilities of a long list of individual gadgets most media products now come in a purely digital and intangible form delivered over the Internet most of these are specific non commodity items but we are now beginning to see some digital commodity goods as well in an 1881 paper organ from boom Bob Eric argued that it is the renditions of service rather than the goods themselves which as a matter of principle constitute the primary basic units of our economic transactions and it is only from the renditions of service that the goods secondarily derive their own significance carl menger also wrote in 1892 some comments that are now uncanny in light of certain developments some 120 years later with the extension of traffic in space and with the expansion over ever longer intervals of time of provision for satisfying material needs each individual would learn from his own economic interests to take good heed that he bartered his less saleable goods for those special commodities which displayed beside the attraction of being highly saleable in a particular locality a wide range of saleable nests in time and place these wares would be qualified by their costliness value per weight easy transport ability and fitness for preservation durability to ensure to the possessor of power not only here and now but as nearly as possible unlimited in time and space generally over all other market Goods consider those words in relation to a weightless digitally non degrading medium of exchange transportable instantly anywhere in the world in the debate over whether Bitcoin should be labelled money or not much depends on these specific definitions that one has in mind in examining these debates I have come to define money as a common unit of pricing accounting and economic calculation in a given context Bitcoin does not yet qualify under this definition but I see no reason that it might not at some time or place in the future I define a medium of exchange as a good accepted for payment in indirect exchange transactions the Bitcoin clearly does qualify under this definition it is being used to actually pay prices that are quoted in terms of local monies the regression theorem makes a series of claims about the process by which a good on the market comes to be a medium of exchange and later in some cases money I believe a popular interpretation of this includes several layers of unwarranted assumptions which I have addressed in several articles and papers however Mises as is typical for him seems to have cleared up all of these misconceptions in one part of one sentence in human action the regression theorem states that no good can be employed for the function of a medium of exchange which at the very beginning of its use for this purpose did not have exchange value on account of other employments what it means to be used as a medium of exchange is specific to facilitate indirect exchange that is non barter transactions logically any medium of exchange must have had exchange value for some other purpose at the beginning or it could never have been traded in this way by definition it is not a statement of should or a criterion for judgment but a statement of possibility this also does not have to be true now or according to the value judgments of later observers it only had to be true then at the beginning and for the people actually involved in addition this is not even a historical or interpretive claim but an implication of the meaning of the concepts being used it does not say this happened at that time or at that place it says this always happens when the conditions appear and just in case there were any questions Mises added it must happen this way nobody can ever succeed in constructing a hypothetical case in which things were to occur in a different way Mises and Mayer clearly did have the examples of metallic money's in mind as they wrote however this does not imply that new examples of the same principles could never arise in the entire course of the future in the mists essien method this does leave an empirical and historical question to be addressed about Bitcoin what was it valued for before it was taken up as a medium of exchange fortunately clear historical records of this entire period exist and many of the early participants are still available to be interviewed in 2009 Bitcoin was a technical experiment with no monetary uses Bitcoin units existed within this experiment and were used as part of it some participants were even crazy enough to think that the system might actually take off one day and they collected bitcoins just in case 2010 saw the first clear patterns of buying and selling Bitcoin for money but buying and selling Bitcoin is not the same as using it to purchase goods and services it was still not being used in any pattern of indirect exchange a story from May 2010 is known as the Bitcoin pizza somebody ordered takeout pizza worth about $25 with a credit card and had it sent to someone else who transferred 10,000 bitcoins to him in exchange this was a first and legendary interaction between Bitcoin and the real world of goods it came almost a year and a half after the network launched the mere creation of Bitcoin units and the Bitcoin system was not the same thing as people actually beginning to take it up and use it in a monetary role in thinking about this case further though I finally came to the idea that even the Bitcoin pizza could also be interpreted as a sale of 10,000 bitcoins for $25 in which case the pizza may have been the medium of exchange not the bitcoins this episode could easily be interpreted as a sale of bitcoins for money mediated by the transfer of a pizza using a credit card one could thus argue that even the Bitcoin pizza still did not yet show even so much as an isolated case of an actual medium of exchange use for Bitcoin not until 2011 is there clear historical evidence along a number of different lines of a pattern in which Bitcoin was being used to purchase goods and services such uses continued to expand to this day this shows a two year period with no pattern of medium of exchange use but during which Bitcoin was being valued for other employments Bitcoin may therefore be the best documented historical illustration of the origins aspect of the regression theorem next to the relationship between the regression theorem and tangibility another issue that has led to debate in Austrian economic circles is how to classify Bitcoin in relation to me typology of monetary objects introduced in his 1912 work theory desk Ellis went to the hospital later partly mistranslated as the theory of money and credit first the purpose of constructing a typology is to account for the empirical monetary phenomena observed in society within a framework that makes helpful theoretical distinctions and groupings among the objects in 1912 there were no cryptocurrencies and in 2013 there are no functioning commodity monies there are mainly fiat moneys and cryptocurrencies a typology and terminology set should facilitate the analysis of what is being considered as Mises put it the first purpose of a scientific terminology is to facilitate the analysis of the problems involved there is no reason to expect that a hundred-year-old typology would be the most useful approach in examining current conditions although it may well be useful as an example of how to go about constructing such a typology for the purpose of theoretical clarification of contemporary issues one option for classifying Bitcoin is to see how the term commodity money could also be interpreted to mean a directly and voluntarily valued money in itself we saw that minger for example refer to commodity markets as contrasted with the buying and selling of specialty goods as a way to explain relatively quiddity his main topic was relatively quiddity not the tangibility or intangibility of goods in this way a strictly economic rather than an objective istic understanding of the word commodity already allows Bitcoin into the same general economic territory as historical commodity monies they are both monetary goods traded directly as themselves without any fixed substitution rates or a claim of representing anything else while this approach which I proposed in March of this year may be a step in the right direction however it is not yet entirely satisfying bitcoin is clearly not the same as historical commodity monies as usually understood I therefore propose the following typology one that gives cryptocurrency its own position next to commodity money with both of them placed under a new and more abstract category I define this first category as monetary objects that can be traded as with other goods without reliance on any particular legal status this means that they need not differ in legal status from any other good in order to facilitate indirect exchange transactions this contrasts with monetary objects that do rely on some particular contractual legal or legislated status to function in this role the result is a hybrid of the functional definitional model of Mises and the natural vs. forced money models described for example in whose Mons the ethics of money production the blue and red designations contrast money freely adopted on the market and other monies in use for reasons other than the free choices of market participants alone the one crossover item in the middle is private brand money certificates physically disconnected from money that is true money substitutes which could conceivably circulate on a purely contractual legal basis that said most of these details now concern either history or speculation about some ideal future society most of these types of monetary objects no longer circulate and have not done so for a long time today we have fiat money's and cryptocurrencies in active circulation for the purchase of goods and services fiat money now represents the category of forced money that relies on a particular legislative status and administrative enforcement cryptocurrency now represents the category that the ideal image of a commodity money used to represent in the pro hard money story that is goods that cans directly in a monetary role without having to rely on any special contractual legal or legislated status to do so understanding Bitcoin entails multiple learning processes and looking from a number of different perspectives in turn and approach I have sought to illustrate in this three-part analysis for more details on the foundations of these viewpoints please refer to my existing and forthcoming written works which contains step-by-step buildups and detailed references and bibliographies this concludes this three-part program thank you for listening

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