Nightcap

  1. How to flip a yield curve George Selgin, Alt-M
  2. How ergodicity reimagines economics Mark Buchanan, Aeon
  3. How to think better about debt Lou Brown, Crooked Timber
  4. Why even have kids in today’s world? Bryan Caplan, EconLog

Be Our Guest: “How to make Brexit Really Worthwhile – Example: Regulation dealing with Information Asymmetries”

Here is the latest installment of NOL‘s new “Be Our Guest” series, this one by the pseudonymous Freeconomist. An excerpt:

Third-party certification provides assurance to consumers that a product or a supplier of professional services meets certain quality standards.

Private suppliers of third-party certification include organisations such as Consumer Reports, the American Automobile Association (AAA), which rates motels, or A.M. Best, rating insurance companies. Examples of third-party certification provided by the government are product safety regulation, food standards regulation or occupational licensure.

Private suppliers of third-party certification can only exist because the product they offer is valued enough by market participants to justify the cost of providing it. And their profits are determined by their credibility.

The same cannot be said for third-party certification provided by the government.

Please, read the rest and do keep submitting your thoughts to us.

Nightcap

  1. Migration in Europe? Where to start! Kapka Kassabova, Spectator
  2. Aristotle’s definition of citizenship John Hungerford, Law & Liberty
  3. Michelangelo’s definition of citizenship M Landgrave, NOL
  4. What can the Catholic Church do? John Cornwell, Financial Times

Financial History to the Rescue: The Harder Money Wins Out

This article is part of a series on bitcoin (and bitcoiners’) arguments about money and particularly financial history. See also:

(1) ‘On Bitcoiners’ Many Troubles’, Joakim Book, NotesOnLiberty (2019-08-13)
(2): ‘Rothbard’s First Impressions on Free Banking in Scotland Were Correct’, Joakim Book,
AIER (2019-08-18)

The great monetary economist and early Nobel Laureate John Hicks used to say that monetary theory “belongs to monetary history, in a way that economic theory does not always belong to economic history.”

Today I’m going to illustrate exactly that with respect to the Bitcoiner’s (mistaken) progressivism in another episode of Financial History to the Rescue.

In the game of monetary competition, the Bitcoin maximalists posit, the “harder” money always wins out. I’ve been uneasy with the statement as it (1) isn’t clear to me what “harder” money (or money’s “hardness”) really means, and (2) probably isn’t historically true. So we end up with something that’s false, or vague – or both! Clearly unsatisfactory. As I pointed out in my overview post to this series, financial and monetary history is almost always more nuanced than what such simple generalizations allow.

Luckily enough, Saifedean Ammous at the Soho Forum debate last week, did inadvertently provide me with a useable definition – and I intend to use it to debunk the idea that money’s history is one of increased hardness. Repeatedly Saif claimed that monetary history, before the advent of central banking, showed us that the harder money always won out: whenever two monetary networks clashed (shells and silver; wampum and gold) the “harder” money won. The obvious implication is that Bitcoin, being the “hardest” money, will similarly win out. Right off the bat, there’s some serious problems here.

First, it’s not altogether clear that such “This time is not different” arguments apply. Yes, economic history teaches us not to discount what seems to be long-standing or universally applicable phenomena – but also to take notice of the institutional setting in which they happen. Outcomes specific to, say, the Classical Gold Standard, rarely generalize into our hyper-modern financial markets with inflation targeting central banks.

Second, over the twentieth century we literally went from the hardest money (gold) to the “softest” money (central bank-created fiat paper money). Sure, you can argue that this was unfair or imposed upon us from above by wars and welfare states, but discounting it as irrelevant strikes me as overly cherry-picking. If the hardest money “lost” before, what makes you think that your new fancy money will win out this time around?

Then Saif returned to the topic of hardness and defined it as a money whose supply is “the hardest to increase.” The hardness of Cowrie shells or Wampum or gold or Whale’s teeth or Rai stones or the other early money that Jevons listed and discussed in 1875, all rely on a difficult, costly and inconvenient process of extraction and/or production. Getting Rai stones from far-away islands, stringing beads together into extended strips of Wampum, or digging up gold from inaccessible patches of the earth were all cumbersome and expensive processes. In Saif’s mind, this contributed to their hardness. Their money stock were simply difficult to expand – in jargon: their money supplies were inelastic.

The early 1600s Dutch Republic struggled with another problem. As the main financial centre of the time, countless hard money (coins) from all over the world were used in Amsterdam. Estimates say over a thousand legally recognized kinds of coins – and presumably even more unrecognized coins. A prime setting for monetary competition: they were all pretty hard (Saif’s definition: difficult and costly to expand) commodity moneys, of various quality, origin, and recognition in trade.

Another feature of 17th century Amsterdam was the international environment of Bills of Exchange (circulating private credit notes). Briefly summarized, merchants across the world traded debts on Amsterdam bankers or traders, and rather than holding and transporting bullion across the world, they transported the debt of the most trustworthy and reliable Dutch financiers. As all such bills required a settlement medium in Amsterdam, trade on thin margins was very sensitive to fluctuations in prices between the commodity moneys in which their bills were denominated – and very sensitive to debasements and re-defined values by various European proto-governments.

In 1609, the City of Amsterdam created the Wisselbank (initially a 100% reserve exchange bank) specifically tasked with standardizing the coinage and to insulate the bill market from currency fluctuations (through providing a ‘neutral’ unit of account for bills settlement). The Bank accepted deposit of whatever coin at the legally recognized rate (unrecognized at metal content) and delivered ”high-quality Dutch trade coins” upon withdrawal. To fund itself, it added a withdrawal fee of 1.5%, but no internal transfer fee, which made holding currency at the Bank very expensive in the short-term, but very cheap in the long-term. Merchants also avoided much of the withdrawal fee by simply trading balances with one another rather than depositing and withdrawing trade coins. In return for this cost-saving, sellers of bank balances would share a portion of the funds saved with the buyer in what’s known as the “Agio”: the price of Bank money in terms of current money outside the Bank’s accounts. This price would fluctuate like any other price on the market and would indicate the stance of liquidity demands.

In a classic example of Alchian’s monetary competition by transaction costs, Dutch merchants and financiers “outsourced” the screening and assaying of unfamiliar coins. They preferred settling their transactions through the (cheaper) medium that was deposits in the Bank.

And it gets worse for the bitcoiner’s story. In 1683, the Bank coupled its deposits with specific receipts for withdrawal; to gain access to coins, one was required both to hold balances and to purchase a receipt issued by the Bank (they also changed the pricing). Roughly speaking, the Bank became a fractional reserved bank (with capped withdrawals) overnight – and contrary to what the hardness argument would imply, the agio on Bank money rose to above par!

Two monetary historians, Stephen Quinn and William Roberds, summarize one of their many writings on the Wisselbank as follows:

“imaginary money on the Bank’s ledgers succeeded because it was more reliable than the real stuff. […] The most liquid asset in the economy was no longer coin, but a sort of ‘virtual banknote’ residing in Bank of Amsterdam accounts.”

Further,

“the evolution of the agio shows that the market valued irredeemable balances as if they were closely tied to backing trade coins” (my emphasis)

The story of the Amsterdam Wisselbank’s monetary experiments and innovations show us that monetary adaption relies on many more dimensions than “hardness.” Sometimes “hard” money is defeated by “soft” money, since the softer money brought other benefits to its users – in this case a cheap and reliable settling medium.

The lesson for bitcoin-vs-fiat-vs-FinTech is pretty clear: hard money doesn’t always “win”; and sometimes “soft” money can better serve the needs of consumers in a free market.

Nightcap

  1. The dubious logic of commodification Chris Dillow, Stumbling & Mumbling
  2. The miracle of General Equilibrium Philip Pilkington, Inference
  3. Orwell’s “Notes on Nationalism,” in Barcelona Deborah Levy, New Statesman
  4. Magical maps and island utopias Rachel Cordasco, Los Angeles Review of Books

What Albert Camus taught us about freedom

The French-Algerian author and philosopher Albert Camus is unarguably one of the most read and thought-provoking intellectuals of the 20th century. Although he mainly gained attention through his philosophical theory of the absurd, which he carefully and subconsciously embedded in his novels, Camus also decisively contributed significant ideas and thoughts to the development of freedom in the post Second World War era. That is why I want to present you five little known things we still can learn from Albert Camus’ political legacy.

  • Oppose every form of totalitarianism

After the Second World War, socialism spread across Eastern Europe and was proclaimed the alternative draft to capitalism, which was regarded to be one of the reasons for the rise of fascism in Germany. On the other side, socialism was believed to bring about freedom for everybody in the end. Even though many intellectuals at first were attracted by the socialist ideology, Camus instantly saw the dangers of its predominant “the ends justify the means” narrative. He justifiably considered the vicious suppression of opposing views in order to obtain total freedom in the future as an early shibboleth for totalitarianism.

To achieve self-realization, an individual needs personal freedom, which is one of the first victims of totalitarian despotism. Thus, Camus vigorously fought against right or left authoritarian proposals – and for individual liberty, which lead to his conclusion: “None of the evils that totalitarianism claims to cure is worse than totalitarianism itself”.

  • A diverse Europe

If one thing is for sure, then it is Camus’ unbroken love for Europe. However, his conception of Europe does not portray the continent as a possible source for collectively controlled industry, military or thoughts. In contrast, he depicts Europe as an exciting intellectual battlefield of ideas, in which for 20 centuries people revolted “against the world, against the gods, and against themselves.” Thus, European people are unified through shared ideas and values rather than divided by borders.

That is why he forecasts the emergence of an unideological Europe populated by free people and based on unity and diversity already in 1957. Although he felt a strong love for his homeland France, he notes that an expansion of the realm he defines as “home” does not necessarily affects his love in a negative way. That is why he later on even argued for the “United States of the world.”

  • Nihilism is not a solution

In “A letter to a German friend” Camus remarks certain similarities between him and the Nazis regarding their philosophical starting point. They both reject any intrinsic, predetermined meaning in this world. However, the Nazis derive an arbitrariness of defining moral categories such as “good” and “evil” as well as a human subjugation to their animal instincts from this perception. Thus, it is allowed to murder on behalf of an inhuman ideology.

Contrary, Camus insisted that this nihilism leads to self-abandonment of humanity. In turn, he argues that we must fight against the unfairness of the world by creating our own meaning of life in order to achieve happiness. If there is no deeper meaning in our existence, every person has to seek happiness in his or her own way. When we accept our destiny, even if it devastating at first glance as he describes it in “The myth of Sisyphus”, we can pursue our own goals and therefore fulfil our personal meaning of life.

  • Total artistic freedom

Considering his artistic background, Camus’ conception of the value of freedom is quite interesting. Classical liberalist such as Locke and Mill regard freedom as the state of nature: The man is born free and thus freedom is the natural state of any person. Liberty for Camus instead is a necessary condition to fulfil every personal perception of the meaning of life. That is why he particularly emphasizes the invaluable worth of liberty for humanity: When people are not free, they cannot pursue their own meaning of life and thus achieve happiness in an unfair world.

Considering the immense value art personally has for Camus, it certainly reflects a major component in his personal equation towards fulfilment, alongside other interests such as sports and love. Hence, it is not surprising that he was a lifelong supporter of total artistic freedom, which prevents nobody from obtaining happiness through individual perceptions of art. That is why he famously concludes “Without freedom, no art; art lives only on the restraints it imposes on itself and dies of all others.”

  • Abrogate the death penalty

In the chilling essay “reflections on the Guillotine” Camus insists on the abolishment of the death penalty. Apart from different scientific arguments such as low efficiency and a non-existing deterrence-effect, Camus also points out the general moral fragility of the death penalty: He is deeply worried by the state privilege of deciding over life and death. This privilege is exploited through the death penalty, which solely is a form of revenge. On the contrary, it is only triggering an unbearable spiral of violence instead of preventing it. Alternatively, he argues for being set at labour for life as maximal punishment.

Albert Camus was not an Anarcho-capitalist nor was he a libertarian. Nevertheless, he regarded individual freedom as an essential element of society and examined the inseparable relation between freedom and art. Every true work of art increased the inner freedom of its admirer and thus free art gives scope for individual happiness. One can never solely serve the other – they presuppose each other. Because of his artistic and philosophical roots, Camus provides an unusual moral argument for individual liberty, which makes him worth reading even today.

Nightcap

  1. Kashmir: a tale of two mothers Swaran Singh, spiked
  2. Joe Biden on the bus Scott McConnell, Modern Age
  3. Assimilation is hard Nicole-Ann Lobo, Commonweal
  4. The market for neighborhoods Salim Furth, National Affairs