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General Category => General Discussion => Topic started by: Seth King on March 17, 2011, 11:05:44 PM



Title: Walter Block Comments On Bitcoin
Post by: Seth King on March 17, 2011, 11:05:44 PM
In my attempt to get someone from the Mises Institute with authority to write an article on the efficacy, or not, of Bitcoin, Walter Block and I recently shared this correspondence.

I started off by writing...

Quote
Among students of the Austrian School there is an ongoing debate over
the efficacy of a new currency called Bitcoin. Since I have started my
blog I have been admonished several times to trade in, and promote, the
underground and anonymous currency called Bitcoin.

While I am all in favor of anonymous and underground trade, Bitcoin is a
patently absurd currency. It fails on many fronts and I am pretty
shocked to see so many Austrians falling for it. However, it could also
be possible that I am in the wrong and fail to see the brilliance that
is Bitcoin. Either way, forums and blog comments are becoming
increasingly geared towards the debate.

To which Dr. Block replied...

Quote
I'm not sure I fully understand it. But, I favor money based on real commodities
(gold, silver, whatever the market settles upon), and, I gather,
bitcoins do not qualify. So, I oppose bitcoins. I favor 100% backed (by
a commodity) currency for reasons that Rothbard and Mises have written
about, over and over again.

I'm sure this will not settle the ongoing Bitcoin debate, so I would like to publish a well written article debunking the Bitcoin scheme by anybody who can use an abundance of Austrian Economic logic in their case.


Title: Re: Walter Block Comments On Bitcoin
Post by: nhwulf on March 25, 2011, 08:14:21 PM
I dont like the the Bitcoin as its not backed by anything. Bitcoin is not to different from our current fiat currency. It is generated not by acomplishment and innovation in the market, but by turning on a computer. What if one does not own a computer? Would wealth be limited to those that bought a 3rd party product rather than work and inteligence? I see no value in Bitcoin beyond the attempt itself as an exersise.


Title: Re: Walter Block Comments On Bitcoin
Post by: daprovic on March 25, 2011, 09:07:51 PM
I dont like the the Bitcoin as its not backed by anything. Bitcoin is not to different from our current fiat currency. It is generated not by acomplishment and innovation in the market, but by turning on a computer. What if one does not own a computer? Would wealth be limited to those that bought a 3rd party product rather than work and inteligence? I see no value in Bitcoin beyond the attempt itself as an exersise.

Bitcoin is backed by the computational proof that there cannot be more than 21million bitcoins in circulation at any point of time.

Bitcoins are cryptographically protected against fraud, and the monetary inflation rate is hard coded in an open source algorithm. It is impossible to produce fake bitcoins, and no one controls the inflation rate.

The reason you want money to be backed by something is in order to restrict inflation, there is no need for that with bitcoins.

You don't see value in a currency that is un-counterfeitable, completely decentralized with no point of failure, that is 100% anonymous and irreversible, that removes the need for a trusted third party such as PayPal to make transactions and that has no transaction fees???


Title: Re: Walter Block Comments On Bitcoin
Post by: Seth King on March 25, 2011, 11:30:33 PM
I've yet to see a reply to the question: What happens when Bitcoin II and III and IV come out? That would be, in effect, inflation. Would it not?


Title: Re: Walter Block Comments On Bitcoin
Post by: daprovic on March 28, 2011, 03:05:53 AM
I've yet to see a reply to the question: What happens when Bitcoin II and III and IV come out? That would be, in effect, inflation. Would it not?

Seth, no that wouldn't be inflation, although I do understand it might seem counter-intuitive. Prices in bitcoin1s are completely independent of how many bitcoin2s or bitcoin3s or whatever other currency there is and how much there is of it. Products would simply be priced differently in bitcoin1s, bitcoin2s, etc.

With many crypto-currencies competing, people would eventually hold several different currencies in their wallet, and choose to spend them on products that are cheapest to them relative to the strength of the currencies they have in their wallets. So for instance, if bitcoin2s have high inflation, products priced in bitcoin2s will be more expensive than in bitcoin1s.

So again, inflation is relative to a specific currency and does not affect the value of different currencies whatsoever.


Title: Re: Walter Block Comments On Bitcoin
Post by: Seth King on March 28, 2011, 05:30:05 PM
That answer is unsatisfactory to me. My second question is what can I do with a Bitcoin? Gold and Silver and other commodities and resources can be used for productive purposes. A Bitcoin is nothing.


Title: Re: Walter Block Comments On Bitcoin
Post by: nhwulf on March 28, 2011, 11:50:01 PM
In 1900 $1 would equal $25 in 2007. At that rate  the tire chains I found for 25 bitcoin (and I did not find much else definitive) valued at $98-$125 dollars shows that bitcoin is worth (where it is accepted) $4 in 1900 gold backed currency or $100 fiat debt backed currency. (Rounded to even 100's for ease) With no backing of a true commodity the bitcoin is nothing more than a faith based electro-dollar. Basing a means of trade off processor time rather than a universal commodity is folly. Bitcoin states that 21,000,000 coin will be distributed. I say distributed rather that produced for a reason. At 21,000,000 bitcoin worth $4 in backed currency in 1900 that makes bitcoin worth $84,000,000 in total value, assuming you accept its worth. This is not going to sustain a population of 310,000,000, regardless of of how many are producers. It is worse when the majority are consumers. At even distribution that leaves 310,000,000 divided by 84,000,000= .3690476 bitcoin per person (in 1900 gold backed dollars) Go ahead, buy bread for a family with that. In 1900 bread was $.25. Does that leave just over 1 loaf of bread per person with bitcoin? check my math, its always suspect.


Title: Re: Walter Block Comments On Bitcoin
Post by: daprovic on March 29, 2011, 02:28:55 AM
That answer is unsatisfactory to me. My second question is what can I do with a Bitcoin? Gold and Silver and other commodities and resources can be used for productive purposes. A Bitcoin is nothing.

My answer is an academic one Seth, it's just economics 101 :s Ask any monetary economist the same question at mises.org and they will respond that your worries are unfounded.

The purpose of money is to facilitate exchange.. not to use it for industrial purposes. The only reason you'd want it to have another use, is if people lost confidence in it as a facilitator of exchange (money), then it would still keep some value as it can be used in production. Now all the reasons for people losing faith in a gold/silver currency do not exist with bitcoins. There is no way for people losing faith in bitcoins, unless everyone in the market using bitcoins stubbornly decided not to use them anymore and decided to lose all their wealth in bitcoins.


Title: Re: Walter Block Comments On Bitcoin
Post by: daprovic on March 29, 2011, 02:42:37 AM
In 1900 $1 would equal $25 in 2007. At that rate  the tire chains I found for 25 bitcoin (and I did not find much else definitive) valued at $98-$125 dollars shows that bitcoin is worth (where it is accepted) $4 in 1900 gold backed currency or $100 fiat debt backed currency. (Rounded to even 100's for ease) With no backing of a true commodity the bitcoin is nothing more than a faith based electro-dollar. Basing a means of trade off processor time rather than a universal commodity is folly. Bitcoin states that 21,000,000 coin will be distributed. I say distributed rather that produced for a reason. At 21,000,000 bitcoin worth $4 in backed currency in 1900 that makes bitcoin worth $84,000,000 in total value, assuming you accept its worth. This is not going to sustain a population of 310,000,000, regardless of of how many are producers. It is worse when the majority are consumers. At even distribution that leaves 310,000,000 divided by 84,000,000= .3690476 bitcoin per person (in 1900 gold backed dollars) Go ahead, buy bread for a family with that. In 1900 bread was $.25. Does that leave just over 1 loaf of bread per person with bitcoin? check my math, its always suspect.

All currencies - whether gold, silver or bitcoins - are faith based, this is their principal characteristic. Your utilitarian concern that "we would run out of bitcoins" is analogous to the myth that we would run out of gold if it was used as currency. The amount of bitcoins or any weight of any commodity is completely irrelevant. The whole world's economy encompassing 7 billion people can be ran on 1 bitcoin. Bitcoins are infinitely divisible (just as gold is), meaning you can divide them ad infinitum (for practical purposes they are rounded off to 8 digits for now). This means that if you had 0.3690476 bitcoins, prices in bitcoins would simply be very small, like 0.00000000123432 bitcoins, which is good, lower prices are good ;) You'd end up spending millibitcoins, micro, nano, picobitcoins...

It seems that you and Steph don't really understand how money technically works :s There are a number of technical books on the production of money and how money works at store.mises.org


Title: Re: Walter Block Comments On Bitcoin
Post by: Seth King on March 29, 2011, 05:20:41 AM
I will admit that there is a possibility that I am totally wrong on this one. I'm just not convinced that Bitcoin is good.

I do agree that the amount of Bitcoins in the world is irrelevant. I've been saying for a while that the entire global economy could function with a gold currency even if only one ounce of gold existed in the universe. The same goes for Bitcoin. It's not the amount of Bitcoins in existence that I am worried about. It's merely the fact that there is no reason for people to use Bitcoins as currency, since it serves no purpose other than being traded.

Gold and silver are valuable as a currency, yes, but they are also extremely valuable as commodities. Gold is used in computing and spacecraft. Silver is the most conductive metal on earth. So people will trade commodities of value for silver and gold. I cannot do anything with a Bitcoin other than spend it. And since Bitcoin II, III, and IV can be created on a whim I see no reason why I should accept payment for something. Yes, if we all collectively decided to trade in Bitcoins it would work. Hell, we all use Federal Reserve Notes and things "work." So while I agree it is possible that Bitcoin can work as a currency, I simply don't believe it will ever catch on. People are using Bitcoins as a currency now. So that is proof that is "works."

I've also said that the free market will have many different currencies. Bitcoin may very well be one of them, but as of right now, I don't accept Bitcoins as payment. I also don't accept Labor Hours as payment either. I know those seem to be popping up in many cities.

Sadly, I don't have as good of an understanding in economics as Walter Block. I would liked to have had him write a full essay on the matter, but he wasn't interested. Perhaps I will be able to find another Mises Fellow to give us a full report on Bitcoin. Hey, they may even think it's the greatest thing since sliced bread. But I'd be willing to bet cash money they show all of its flaws in extraordinary economic prose.

Bitcoin is definitely growing in popularity and the conversation is infesting a lot of blogs and forums. It's past time a Mises Fellow addressed the issue. If you're a Mises Fellow and reading this, PLEASE PUBLISH YOUR ESSAY WITH DAILY ANARCHIST!! =)


Title: Re: Walter Block Comments On Bitcoin
Post by: randallstevens on March 30, 2011, 08:54:40 AM
That answer is unsatisfactory to me. My second question is what can I do with a Bitcoin? Gold and Silver and other commodities and resources can be used for productive purposes. A Bitcoin is nothing.

My answer is an academic one Seth, it's just economics 101 :s Ask any monetary economist the same question at mises.org and they will respond that your worries are unfounded.

The purpose of money is to facilitate exchange.. not to use it for industrial purposes. The only reason you'd want it to have another use, is if people lost confidence in it as a facilitator of exchange (money), then it would still keep some value as it can be used in production. Now all the reasons for people losing faith in a gold/silver currency do not exist with bitcoins. There is no way for people losing faith in bitcoins, unless everyone in the market using bitcoins stubbornly decided not to use them anymore and decided to lose all their wealth in bitcoins.


I agree that that the purpose of money is to facilitate exchange, but the key reason that gold and silver are money (in addition to the industrial uses and their good money properties) is that people are trading their labor for someone else's labor. When I get paid in gold coin, I am trading my labor for the labor of the miner, the refiner, and the minter, along with all the others whose labor directly or indirectly went into producing the coin. I don't really see where there is labor involved in "producing" a bitcoin, outside the initial programming to start the whole thing.

I also see a problem in conducting typical hand to hand "cash" payments with bitcoin as well. If I go to sell something that I posted on Craigslist, I'm sure not going to accept bitcoins in payment.

Despite these problems, so long as there is no force or fraud involved, if people wish to conduct trade in bitcoin, they are certainly welcome to.


Title: Re: Walter Block Comments On Bitcoin
Post by: Seth King on March 30, 2011, 12:49:19 PM
That answer is unsatisfactory to me. My second question is what can I do with a Bitcoin? Gold and Silver and other commodities and resources can be used for productive purposes. A Bitcoin is nothing.

My answer is an academic one Seth, it's just economics 101 :s Ask any monetary economist the same question at mises.org and they will respond that your worries are unfounded.

The purpose of money is to facilitate exchange.. not to use it for industrial purposes. The only reason you'd want it to have another use, is if people lost confidence in it as a facilitator of exchange (money), then it would still keep some value as it can be used in production. Now all the reasons for people losing faith in a gold/silver currency do not exist with bitcoins. There is no way for people losing faith in bitcoins, unless everyone in the market using bitcoins stubbornly decided not to use them anymore and decided to lose all their wealth in bitcoins.


I agree that that the purpose of money is to facilitate exchange, but the key reason that gold and silver are money (in addition to the industrial uses and their good money properties) is that people are trading their labor for someone else's labor. When I get paid in gold coin, I am trading my labor for the labor of the miner, the refiner, and the minter, along with all the others whose labor directly or indirectly went into producing the coin. I don't really see where there is labor involved in "producing" a bitcoin, outside the initial programming to start the whole thing.

Despite these problems, so long as there is no force or fraud involved, if people wish to conduct trade in bitcoin, they are certainly welcome to.

Well said.


Title: Re: Walter Block Comments On Bitcoin
Post by: David Giessel on April 01, 2011, 08:43:50 AM
Menger informs us that value is imputed. We don't want to argue gold as money based on the labor theory of value.


Title: Re: Walter Block Comments On Bitcoin
Post by: randallstevens on April 01, 2011, 11:00:49 AM
Menger informs us that value is imputed. We don't want to argue gold as money based on the labor theory of value.

I am going to fall short on the explanation, as I'm still groping my way through the learning process of Austrian economics, so please forgive my obtuse answers. I'm only saying that part of gold's value is due to the fact that someone else's productive labor was required to make it into money. Real wealth is based on production. The more a society can produce, the wealthier it is. Once the productive effort is made to build a printing press and make the paper, fiat currencies cease to be a measure of productive value. Simply adding zeroes onto green pieces of paper doesn't make it worth more.


Title: Re: Walter Block Comments On Bitcoin
Post by: Seth King on April 01, 2011, 04:18:08 PM
Menger informs us that value is imputed. We don't want to argue gold as money based on the labor theory of value.

This is true. This is why Bitcoins are liked by so many people and has the potential to grow in use. They like the fact that it is anonymous etc. But I think their imputed value will drop dramatically once Bitcoin II and III come out and the supply skyrockets.


Title: Re: Walter Block Comments On Bitcoin
Post by: David Giessel on April 01, 2011, 09:05:17 PM
Randall, this will give you a condensed version of the idea of utility vs price.
http://en.wikipedia.org/wiki/Paradox_of_value

The marginal revolution was really the birth of Austrian Economics proper (tho the Austrian ideas go back to the School of Salamencia).

Bitcoins in my mind fail in one specific area: durability.

Gold is extremely resistant to oxidation, as are the other precious metals. It is also extremely resistant to corrosion.

Also, gold's use is not predicated on any higher order infrastructure. Bitcoins require electric and data transmission infrastructure to be useful. They can "disappear" if these technologies go away, or in areas where these technologies don't exist.

On the other hand, gold is dependent on physical storage infrastructure whereas bitcoins can be scuttled around the world in milliseconds. Bitcoin confiscation would pose a much larger obstacle to governments than gold confiscation. Also, it'd be a lot easier to take bitcoins overseas when traveling (or send them overseas to where you will be traveling to) than transporting gold coins through customs.

This would indeed be an interesting topic to look at in greater depth as there are a lot of angles to it. Hayek has a short essay that discusses what a free market monetary system might look like. He was not convinced that precious metals would necessarily emerge.
http://mises.org/books/monetarysystem.pdf

Rothbard on the other hand often discussed the unlikelihood that if he made "Rothbards" that were backed by nothing, people would choose these over a metal backed currency. The idea behind Bitcoins is very different to the concept of any fiat money that has existed previously however.



Title: Re: Walter Block Comments On Bitcoin
Post by: Seth King on April 01, 2011, 10:12:55 PM
To me, money is just resources that we trade as an efficient medium of exchange. It can be gold or silver, but it can also be warehouse receipts in whiskey or even common stock. Hell, it can even be lottery tickets.

Yes, I understand that value is imputed. But I see no reason for me to impute any value on something that I can't actually do anything with, like Bitcoins.


Title: Re: Walter Block Comments On Bitcoin
Post by: despicable on April 06, 2011, 10:41:46 PM
I'm going to have to agree with Dr. Block on this one.


Title: Re: Walter Block Comments On Bitcoin
Post by: JustSayNoToStatism on April 07, 2011, 01:00:47 PM
Quote
Seth, no that wouldn't be inflation, although I do understand it might seem counter-intuitive. Prices in bitcoin1s are completely independent of how many bitcoin2s or bitcoin3s or whatever other currency there is and how much there is of it. Products would simply be priced differently in bitcoin1s, bitcoin2s, etc.
Here's my way of rehashing the idea I believe daprovic was conveying: Consider that people use dollars and gold as a way of storing wealth.
Now the reason you hold the gold is because it’s resistant to the inflation of the dollar. So the creation of dollars doesn’t harm your gold. In an analogous situation, if bitcoin2 competes with bitcoin 1, you have nothing to worry about, because the supply of competing bitcoins doesn’t really matter. In sum, just think about whether, as a current gold owner and dollar holder, you feel an inflation threat from bitcoin1. Of course not.

However, Seth's concern, which daprovic noted:"Products would simply be priced differently" is a valid one, it's just not called inflation. The value of your currency of choice does depend on the demand for it, which depends on its popularity. So if you hold bitcoins, and bitcoin2 takes the world by storm, you could get stuck with a bunch of bitcoins worth nothing. Of course, the price of gold falls when the dollar surges as well, so no matter what you hold, there is a risk....but with gold the risk is less, and this ties into the rest of the discussion
Quote
Gold and Silver and other commodities and resources can be used for productive purposes. A Bitcoin is nothing.
Quote
The purpose of money is to facilitate exchange.. not to use it for industrial purposes. The only reason you'd want it to have another use, is if people lost confidence in it as a facilitator of exchange (money), then it would still keep some value as it can be used in production
Quote
But I see no reason for me to impute any value on something that I can't actually do anything with, like Bitcoins.
The fact that gold and silver have uses is what gives people the INITIAL confidence to get rolling and remain a facilitator of exchange. Bitcoins could work, industrial value is not a necessity for its function, but Bitcoin’s lack of industrial value is a serious impediment to its adoption….the truth is that gold's industrial value doesn't account for much of the price it sells at. The demand for gold comes mostly from people wanting to hold it, for the sake of holding it. If everyone adopted bitcoins, your gold wouldn't be worthless (as bitcoins would be in the reverse situation), but it would be worth LESS...a LOT less
Quote
Bitcoins in my mind fail in one specific area: durability.
Kinda. I think they are more durable than most people would suspect though. And to be fair gold fails because it has to be physically transported, while bitcoins don’t.
…as to the discussion on labor theory of value, I think Giessel covered it. Value is whatever I decide it is, and does not inherently have anything to do with labor. It may “tend” to overlap with and have some correlative relationship with the amount of labor that goes into it, but this is not where value comes from.


Title: Re: Walter Block Comments On Bitcoin
Post by: despicable on April 08, 2011, 02:06:12 AM
I confess that I really don't know anything about these bitcoins. But I have read Mises' Theory of Money and Credit. Mises makes the case that the market chose gold or silver as money. They were deemed valuable by the market before they became money. No one said, "Hey, this stuff is durable yet easily divisible. Let's make it a universal exchange medium". This Bitcoin idea sounds suspiciously like fiat.