In 1958, Leonard E Read wrote an essay, “I, Pencil.” He did not know it at the time, but this article soon became the most important description of the division of labor that has ever been written. It is not as famous as Adam Smith’s description of the pin makers, but analytically, it is far superior. It is also a lot more fun to read.
The article begins with the narrative of a pencil. The pencil tells of his origin. He makes the crucial point that nobody knows how to make a pencil. This seems fantastic. Yet, as the narrative continues, it becomes obvious that the statement is true. There is so much that goes into a pencil. There is wood, carbon, rubber, metal, and paint. There is also all of the equipment to make these items into a single pencil.
But this just is the beginning. How is the metal made? How is the tree harvested? What about the chainsaws that cut down the tree? This goes on, and on, and on. That is the whole point of the article.
Read makes this point: all this is done without central planning. All of this is done by means of the division of labor.
But what Read doesn’t mention, which is the heart of the matter, is the monetary system. It is only through a system of prices, meaning monetary prices, that all of this can be coordinated by the market process. It is the miracle of the market, as Read called it, but this miracle depends completely on one thing: a monetary system. Without a monetary system, the division of labor simply collapses.
VIRTUAL MONEY IN A REAL WORLD
Now let’s talk about Bitcoins. Bitcoins exist as a means of payment only because there is yet money in the general economy. Bitcoins is a spinoff of the fiat money systems of the world. Bitcoins could not exist if there were not an integrated system of digital currency.
You have to have digital currency in order to buy Bitcoins. This digital currency leaves a record. Every purchase you make with the digital currency leaves a record. You are then told that you can make purchases with Bitcoins. These will not leave a record. As long as you never have to reenter the monetary economy of the government’s fiat money systems, there is no further trace of your purchases with respect to digital entries.
But this creates a problem for the person selling you something. If the item that he sells you is manufactured, then he has to rely on the division of labor. He has to reenter the world of fiat money currencies, meaning government run and central bank run fiat money currencies. He must convert his Bitcoins to real money. That is because he must buy real goods.
Bitcoins are virtual money. Problem: virtual money buys very few real goods. For virtual money to buy anything, the virtual money must be converted back into real money, which is digital money, which is money that is an entry in a bank account. At this point, all of the supposed privacy of Bitcoins disappears. Now the government can trace whatever happens.
(For the rest of my article, click the link.)