4 Reasons Why Economists Should Love Bitcoin

I studied economics and this doesn’t make sense to me. From an academic standpoint all I see is vast potential for this technology. Here are the top 4 reasons why economists should love Bitcoin:

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4 Reasons Why Economists Should Love Bitcoin

Ask most economists what they think about Bitcoin and you’ll likely get an answer somewhere on the scale of “more like bit-con, amirite” and “I want bitcoin to die in a fire.”

Not very friendly.

I studied economics and this doesn’t make sense to me. From an academic standpoint all I see is vast potential for this technology. Here are the top 4 reasons why economists should love Bitcoin:

4. Bitcoin Makes Trade Easier

Bitcoin Makes Trade Easier

Modern economics is rooted in the belief that competition in the global economy is a non-zero-sum game. What this means is that when nations interact through peaceful relations and trade all willing participants benefit. This belief is at the root of all arguments for free trade and globalization; the more opportunities there are for people on Earth to trade with each other, the better off we will all be.

This belief was born as a response to mercantilism, an economic theory that dominated Europe from the 16th to 18th centuries. Mercantilists viewed world trade as a zero-sum game meaning that nations were competing for a set amount of world wealth. This discouraged cooperation with anyone outside of national borders. International trade was seen as a tool to weaken other countries.

The classical arguments against mercantilism and for absolute wealth via cooperative international trade were first laid out by Adam Smith in his landmark book The Wealth of Nations and then refined by economist David Ricardo in his Theory of Comparative Advantage. They form the basis for the widespread belief among modern economists that tariffs, import and export licenses, and other forms of trade barriers are generally bad for the world economy.

On the flip side, this also means that economists are generally supportive of any regulations or technologies that make international trade easier. This is where Bitcoin comes in. As the first globally available avenue for sending value around the world instantly, the Bitcoin payment network (if allowed to flourish) should be an immensely powerful tool for fostering the continued globalization of trade and, by extension, greater prosperity for all of humanity. Economists that are true to their roots should recognize this opportunity.

3. It Can Help Developing Economies

Bitcoins Can Help Developing Economies

In his book The Mystery of Capital renowned economist Hernando de Soto tackled an interesting question: why does capitalism triumph in the west and fail everywhere else? He found the answer in property rights, specifically, the lack of them, in underdeveloped economies. According to Polar, without essential public institutions to officiate and record economic activity, capitalism cannot help free these nations from the grip of poverty. From Capital:

“The poor inhabitants of these nations—five-sixths of humanity—do have things, but they lack the process to represent their property and create capital. They have houses but not titles; crops but not deeds; businesses but not statutes of incorporation. It is the unavailability of these essential representations that explains why people who have adapted every other Western invention, from the paper clip to the nuclear reactor, have not been able to produce sufficient capital to make their domestic capitalism work.”

Today Polar works with his think tank, The Institute for Liberty and Democracy, on “creating modern legal frameworks that help the poor of the developing and ex-communist world access property and business rights and turn their assets into leverageable capital.” Polar is not alone in his assertions that property rights are essential to successful capitalist economies and his work has inspired efforts from the World Bank and USAID to promote microeconomic reforms focused on these issues.

Unfortunately, proper governance is not something countries can simply choose to have. As much as reforms are encouraged by well-meaning NGO’s, they are notoriously hard to implement and face opposition from entrenched interests. The inefficient bureaucracies of third world nations are ripe with corruption and therefore resistant to change. But what if you could implement a bureaucracy without the corrupt human element?

Cryptocurrencies paired with smart property technology could be exactly what developing countries need to solve that problem. Economists like De Soto should be thrilled by the idea of the world’s impoverished people being able to access open source, democratic, and decentralized forms of property rights. Smart property still has a long way to go (that page reads “there are currently no implementations of this technology”), but with proper funding for development and implementation it could revolutionize access to financial markets for the world’s poor.

2. Free From Political Manipulation

Bitcoins Free From Political Manipulation

One of the main problems economists struggle with is convincing politicians to listen to their policy recommendations. This is because what makes sense to do economically is often a terrible idea politically. Take our earlier example of free trade. While it is an acknowledged fact among economists that open borders and free trade are in the best interest of the majority of the population, a politician that relies on being elected by factory workers will never vote for a bill that makes life harder for his constituents by making them vulnerable to foreign competition. Want more proof? Ask Tesla.

This kind of manipulation happens at all levels of government and it is something that economists have simply learned to live with. The sad truth of the matter is that you need a money supply to operate trade, and for that money supply to be legitimate there needs to be a government backing it, and if there is a government backing that money supply then there will be manipulation based on political reasoning that has nothing to do with sound economics.

Economists from completely different ends of the spectrum can agree on this issue. Ask Paul Krugman (sworn enemy of Bitcoin) why the U.S.’s US$800 billion stimulus package didn’t do its job in turning around the recession and he will blame Republican opposition to the idea of immense government spending (Krugman’s official stance is that US$800 billion was not enough).

Ask the Wall Street Journal and they will say that the stimulus pushed by the “intellectual and political left” made things worse. Meanwhile the rest of the population lives in financial stagnation waiting on the glorified shouting match that is American politics to stumble upon an economic solution.

Bitcoin offers an opportunity to remove political influence from these important economic decisions. Consider what Jon Matonis, Head of the Bitcoin Foundation, has to say on the subject:

“If I had to describe Bitcoin in three words, it would be money without government. Bitcoin, through market based legitimacy, has really proven to the world that we don’t need a centralized authority to tell us what has value. We don’t need a central bank or governmental authority to tell us something is legal tender or to say it has legal based legitimacy. Bitcoin is a demonstration in market based legitimacy. This alone has profound implications for society, for financial services, and also for interactions with respect to digital assets going into the future that we can’t even comprehend yet...It solved a fundamental mathematics problem in distributed computing and it’s gone on in five short years to have a market cap of ten billion dollars.”

Thanks to this revolutionary invention economists no longer have to rely on flawed governments to maintain the most essential of economic tools: money.

1. It’s an Exciting Experiment

Bitcoins is an Exciting Experiment

Economics is a science, a dismal one, but a science nonetheless. But what is science? According to Google it is “the intellectual and practical activity encompassing the systematic study of the structure and behavior of the physical and natural world through observation and experiment.” In other words: trying stuff out and seeing what happens.

This basic idea is at the root of a problem that has bothered me for quite some time. Why do economists hate Bitcoin when it’s arguably the most interesting economics experiment of the new millennium?

Scientists aren’t supposed to shun an idea because it goes against the status quo; they are supposed to welcome it. Science is about proposing an idea and then telling everyone in the world to try and poke holes in it because that’s the best way to thoroughly prove (or disprove) that you’ve found an answer. Unfortunately, when it comes to Bitcoin, which is challenging traditional beliefs about money, scientists of economics are instead choosing to laugh at the idea that Bitcoiners could possibly be wrong.

Perhaps if the arguments against Bitcoin were thoughtful they could get a pass, but the most popular economic refutation of the protocol, that Bitcoin is deflationary, isn’t true right now and won’t be until almost all of us are dead. And even if it were deflationary right now...why does that matter? The head scientist behind the protocol has said time and again that this is “an experiment”. There’s no need to go around calling something evil for trying out a new idea.

There are so many more interesting economic facets to Bitcoin than whether or not its lack of supply increase in 2140 will lead to a deflationary spiral. How about we discuss the fact there are exactly zero counterfeit bitcoins in circulation? Or how the global market for bitcoins is probably the closest thing to perfect competition to ever be observed? It doesn’t even have to be positive observation. Criticisms over the potential problems of mining centralization at the very least further the discussion, show a valid understanding of the technology, and open the door for potential solutions.

In the end though, economists will probably continue to disregard what is going on with Bitcoin. And that’s ok. It just means there’s more for the rest of us to love.  

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