Home / Austrian Economics / Bitcoins: The Road to Investment Hell
Print Friendly and PDF

Bitcoins: The Road to Investment Hell

Written by Gary North on December 3, 2013

Recently, the Economic Policy Journal ran an article, “Is Bitcoin Money: What Economists Have to Say.” The editor asked a dozen economists. Two said “yes, Bitcoins are money.” Here is the answer of one of the “yes” economists.

Yes. Bitcoin is money because it is limited in amount by internal characteristics enforced by the laws of mathematics and thermodynamics that is not subject to counter-party risk or anyone’s liability and it also functions as a currency because it acts as a medium of exchange.

I had never heard of the gentleman. I can say this: nothing in his defense of Bitcoins as money is even remotely Austrian. It ignores the market.

The other one defended her “yes” position with a statement about what money is, not what Bitcoins are.

Money becomes real when people have faith in it. Governments have no monopoly on that which is why they spend a lot of time putting many symbols of faith and trust on the currency from pictures of sovereigns like the Queen or the President to hidden symbols of power like pyramids and seals. They would not need to if it stood on its own. Faith can be earned and it can be lost. The problem with bitcoin is that people are afraid a power outage or a hacker or bad management could erode or destroy the value of a bit coin. But, then again, governments are doing their best to erode confidence in fiat money too.

Everyone else said “no.”

There are public defenders of Bitcoins. Several are mostly libertarian programmers. They do not appeal to economics or to economic history. They appeal instead to the good intentions of the programmers who are using Bitcoins.

What I am waiting for is a detailed defense of Bitcoins from an Austrian school economist or economic historian. I want to see how the Bitcoins market corresponds with the Austrian school’s thesis of the regression theorem: money as a market product that has come in response to the transition of a widely used commodity into money.

The defenders of Bitcoins must deny the Menger-Mises regression theorem. They must affirm what Hayek called constructivist rationalism: the imposition of a man-made plan to create a new social order. He associated this impulse with the State. But defenders of Bitcoins say a genius created a new money.

Here is this thesis, as stated by programmer Paul Rosenberg.

Gary begins by quoting old definitions of money. There is nothing particularly wrong with those definitions, but are they supposed to negate progress for all time? To freeze the world in place? Should they make any new adaptation evil? I hardly think that was their intent.

Here it is, in no uncertain terms. The Menger-Mises regression theorem was good for its day, but we live in a New World Order, a world of digits. Now we must abandon the old Menger-Mises theorem.

He quoted me:

Here is the central fact of money. Money is the product of the market process. It arises out of an unplanned, decentralized process. This takes time. It takes a lot of time. It spreads slowly, as new people discover it as a tool of production, because it increases the size of the market for all goods and services.

He says that “Bitcoin is nothing but the operation of market forces — there is zero coercion involved.” True. But it is not money.

“Bitcoin is utterly decentralized — there is no center at all.” True, but it is not money.

(For the rest of my article, click the link.)

Continue Reading on www.garynorth.com

Print Friendly and PDF

Posting Policy:
We have no tolerance for comments containing violence, racism, vulgarity, profanity, all caps, or discourteous behavior. Thank you for partnering with us to maintain a courteous and useful public environment where we can engage in reasonable discourse. Read more.

5 thoughts on “Bitcoins: The Road to Investment Hell

  1. "Here we see something sad and ironic: a man who hates the Fed, trying to ruin the one tool that can actually slay the Fed…Bitcoin is not important because its price is rising – it’s important because it takes the control of money away from the cartel. "

  2. USD worse than BTC says:

    not money, but BT it is a currency. gary you said in another article that dollars are money, when they really are not, they are also just currency. How can you defend dollars as money? —no intrinsic value, unless you consider paper and the very few base metal coins as intrinsic value..–?

  3. Good point!

  4. I don’t pretend to understand Bitcoin. It reminds me of engineering school, 60 years ago. Civil, mechanical, structural, aeronautical, mining and petroleum all had a material quality one could grasp. But, students jokingly called electronic engineering “witchcraft.” . . . . I suppose it’s the same thing with economists and Bitcoin. Witchcraft?

  5. The regression theorem rests on the reasonable supposition that a substance not originally used as a medium of exchange became a medium of exchange because people began to value it as such. But the reasons why they may have done so are speculative. Perhaps they believed the medium was going to retain its use value or would continue to be coveted for its attractiveness or was infused with a positive taboo of some sort. But we don't truly know. And because we don't know, we can't say that a medium of exchange may not, at first, have been a fiat ("thou shalt…") currency.