I guess I should be flattered or something. Over a year ago I discovered Bitcoin and thought them interesting enough to break my silence and write an article for LRC about it. It was my first one in nearly 3 years, and Lew spent a lot of time helping me shape a reasonable narrative. So, I find it interesting that after David Kramer’s dismissive and juvenile blog about Bitcoin here and Lew running an interview with Doug Casey about it here, that Michael Rozeff would write this blog this morning.
Kramer (and Casey) can go on and on about Rothbard’s and Mises’, astute mind you, argument about how money comes into being.
Some responders have even mistakenly used Austrian economics to rationalize their views. I would suggest that before you write to me about the Austrian economics view of a medium of exchange, you should read the two books by one of the two giants of Austrian economics, Murray Rothbard, on what a medium of exchange is. Here is the pdf for Rothbard’s What Has Government Done to Our Money and here is the pdf for Rothbard’s The Case Against the Fed. For those of you who have not yet read any Austrian economics, please do not waste your time writing to me trying to explain the “scientific” breakthrough of the bogus Bitcoin computer program. (There already was a REAL digital currency, e-gold, that was backed by a real commodity until the Federalistas shut it down. Eventually, Bitcoin will be shut down too because of its anonymity capabilities.)
He is correct that this is Rothbard’s argument. I made this same argument on the Bitcoin.org forums last year after publishing the article. It sparked a very good discussion. But, unlike Mr. Kramer who is convinced by Rothbard’s argument and whose mind is closed to the idea of how Bitcoin’s generation model functions or how it can interface with (and possibly radically shorten) the cycle of marketplace acceptance, I was willing to consider other forces which might make Bitcoin an attractive medium of exchange. It’s obvious that Mr. Kramer is acting as a gatekeeper to the holy house of Rothbard. What I find interesting and sad is that what I know of Rothbard, he most likely would have embraced the idea if not the implementation.
Mr Rozeff has rightly seen through to the heart of the matter, which is that it does not matter what we theoreticians think about money, the market decides whether something is acceptable or not.
It’s obvious that they are a free market money because people are using them as such. There have been a large number of free market monies historically. The market decides, not analysts. Analysts can ponder what factors lead to a money’s use and survival, but the valuation of the money is ultimately left to the market. It’s equally obvious that, like any other money including gold, the bitcoin prices depend on factors that affect its supply and demand. Bitcoin prices were negatively impacted recently by such things as Schumer’s threat, a supposed theft, and a series of security lapses and problems.
I’ve transacted in Bitcoins. Traded them a bit on Mt. Gox, putting $5 on the line to see how things would work out. At the time they were trading for $0.055-$0.06 each. They are now trading at $17 for reasons that seem opaque to me. We are all humbled before the market and as I said originally in my article, which it’s obvious David Kramer decided not to read ( I guess being a part of the club still doesn’t rate attention), whether Bitcoin survives or not is not the point. The point is that people are responding to the threat of the instability created by the Federal Reserve’s money and are looking for alternate solutions. As Lew said to me while while working on that article, “let a thousand flowers bloom.” Our knowledge, or pretense thereof, is limited. While we may think we have these things all worked out and that’s that, what happens then when we are wrong? You know, Hayek and the Fatal Conceit and all that.
We, as Austrians, level that complaint at all forms of central planning, and central banking in particular, at every opportunity. I think it’s funny when the market reminds us that we are just as hubristic (and human) as those we assail with our logic and analysis.
Ahh… the market is a truly wonderful thing.
UPDATE: Dr. Rozeff just posted another blog on the subject, saying exactly what I just said above:
And why is universal acceptability a necessary criterion? Who hands down these edicts anyway? And who says that money MUST emerge from a commodity? (von Mises I know [Menger too], but what makes that pronouncement authoritative?) And is it really barter when you use another object (like bitcoins) to mediate an exchange? If so, then all money transactions are actually barter.
Just b/c Mises and Rothbard said money had come from a commodity in the marketplace, doesn’t mean that it’s true in all instances, or that it had to be universally accepted beforehand. It is just their observation of history and how commodities in the past had been brought to the marketplace. The development time for this new commodity, which he smartly discusses in his blog, and its acceptance in the market has been extremely short, but it is non-zero. The value proposition for Bitcoin is definitely tied to a number of factors: anonymity, independence from the government-controlled money supply, fixed rate of creation and others. The rapid acceptance of this value proposition signals that there was a huge arbitrage which needed to be filled in the market for money.