Intellectuals You Should Know About

I read a lot. Wide, deep and across quite a number of different fields. As a self-proscribed ‘writer’ and ‘editor’, reading much is both satisfying an intellectual desire and a professionally useful practice in familiarize myself with various styles, voices and topics. A common tip for aspiring writers is to read someone they admire and try to imitate their style; at this, at least, I am somewhat successful, as a friend recently told me that my style reminded him of Deirdre McCloskey. Full of idolized admiration for Deirdre’s work, I couldn’t imagine a higher praise.

As readers, the eternal curse of modernity is our laughable inability to keep up with the couple of millions of books that are published every year. Not to mention written materials on blog or respectable outlets or in magazines and journals. As consumers of the written word, we are completely outstripped, utterly defenseless and overwhelmingly inundated.

When in September I published my discussion of geographer and anthropologist Jared Diamond’s impressive work, I got a lot of feedback of astonishment from friends and family – including the friend that praised me for occasionally (accidentally…?) write like McCloskey: “Wow,” he said, “I’ve never heard of him before!”

Huh, I thought. I wonder what other household names of public intellectuals are not read as much as they deserve.

My exact reaction of astonishment was more like a gaping “What?!”, betraying my wanna-know-everything attitude, slight elitism and writer lifestyle. Contrary to the belief that our times is one of all talking and no listening (well, writing and no reading), it takes a vast amount of reading before you can produce anything that others want to read. Sure, anybody with a laptop and an internet connection can start a blog and flush out their thoughts (I did so for years) but it takes knowledge to say something intelligent and interesting – knowledge acquired by extensive reading.

It also takes a lot of practice to develop a voice of one’s own. Authors with astonishing and recognizable writing styles are made, not born.

What, then, should you read?

In light of this surprise, I decided to make a list of intellectuals I would advise anybody to read. Note that this is not a list of the most important thinkers ever, nor is it a collection of the most profound academic contribution to various disciplines. Instead it’s a gathering of writers whose popular writing (often in addition to their rigorous academic work) is exactly that – popular. That means that a lot of others liked them (and if you’re anything like others, you might too) and more importantly: a lot of smart people you meet are rather likely refer to these authors or to the ideas contained in their work. Here are 11 authors I would consider to be household names and whose writing will make you a much smarter and interesting person.

Jared Diamond

Let’s begin our list with aforementioned Jared Diamond, whose trilogy on humanity is compulsory reading for pretty-much everyone. This year he released Upheaval, which received very mixed responses and that I decided to skip after hearing his pitch on Sam Harris’ Making Sense podcast. Diamond’s publisher maintains that this is the third installment of his “monumental trilogy” of how civilizations rise and fall, but to me that was The World Until Yesterday: 

  • Guns, Germs and Steel is the book that definitely made Diamond a well-known name, the kind of Big Picture civilizational economic history we have recently seen in Yuval Harari’s work – the author of Sapiens: A Brief History of Humankind, that strangely boring book that everyone seems to be reading these days – or the less well-known but more captivating Columbia professor Ruth DeFries’ The Big Ratchet. If you like, you could describe this Pulitzer prize-winning book as well-written geographical reasons for why the West is rich and the Rest isn’t. If that’s your thing, read away.
  • Collapse: How Societies Choose to Fail or Succeed, the book that my September piece was mostly concerned with, is a dense story of many different human civilizations falling apart: Easter Islanders, Native Americans in the dry southwest or central America and my favourite chapter: The Greenland Norse. Complemented with the Fall of Civilizations podcast and Dan Carlin’s recent book The End is Always Near would make you ridiculously interesting to talk to in these hyper-catastrophist times. Upheaval is a natural extension of Collapse so if you crave more, that one is for you.
  • I would rather point to The World Until Yesterday for Diamond’s third gem as it is a deep dive into the lives of traditional societies in general, but in practice mostly New Guinean societies. Somehow, Diamond made anthropology exciting!

Paul Collier

Rapidly moving up in controversy, Paul Collier is an Oxford development economist whose work most intellectuals have a distinctly firm opinion about. His popular claim to fame rests on:

  • Exodus, a very cool (and prescient!) take on global migration. Highly recommended.
  • The Bottom Billion, for a plunge into global poverty and development economics. It might be slightly outdated (published in 2007) as many of the 60 failing countries he identifies have seem quite some growth in the last decade.

I should also recommend his latest book, Future of Capitalism, but I wasn’t very impressed with it. In these times of political polarization, populist uprisings, urban-rural divides and worries about AI, it is still a relevant read.

Whenever Collier speaks, you want to listen.

The Four Horsemen of Atheism (or “New Atheism”):
Christopher Hitchens, Sam Harris, Richard Dawkins, and Daniel Dennett

to which we should add the “one Horse-woman“, Ayaan Hirsi Ali, whom I’m ashamed to only know as “the wife of Niall Ferguson” (yes, my background is money and history, OK, not politics or religion…).

Together, these 5 brilliant minds may have helped many out of their religiosity, but their contributions loom much larger than that. As most of the Western world has gradually abandoned faith, their religious inclinations have turned to other areas: environmentalism (Mike Munger’s take on recycling never gets old!), invented hierarchies or social justice. The writings of these five horsemen can be hugely beneficial here too. Some recommended reading includes:

Speaking of Ferguson, as I’m a big financial history guy, I am shamelessly squeezing in this prolific writer, professor (well, Senior Fellow at Hoover institution nowadays) and public intellectual:

I should also mention his two-volume biography of Henry Kissinger (first volume 2015, next probably finished next year), which I ignored (politics is boring) and his recent book The Square and the Tower, which I heard very bad things about – and so downgraded for now.

Steven Pinker

Ah, this Harvard cognitive scientist and linguist-turned-public-intellectual is a must-read. His top trilogy, which I voraciously consumed last fall, includes:

  • The Blank Slate, the best description of this book that I ever heard came from Charlotta Stern, sociologist at Stockholm University: every sound argument against the “Nurture Only”-idea that biology doesn’t matter compiled into a single book. Yes, you want to read it.
  • The Better Angels of Our Nature, a Big Picture humanity-scale look at violence, resurrecting Norbert Elias’ Civilizing Process theory to explain why we hurt and kill each other less than at probably any point in human history. Nassim Nicholas Taleb (see below) is decidedly not convinced
  • Enlightenment Now! The Case for Reason, Science, Humanism, and Progress, as if Better Angels wasn’t Big Picture enough, here’s the ultimate case for why humanity is doing pretty well, why doomsday sayers are wrong on every count and why we shouldn’t despair. Many of the topics of Better Angels re-occur in Enlightenment Now!, but I don’t regret reading both as Pinker’s prose is easy to follow and his content well-sourced should you require more convincing. Originally a cognitive scientist, he has a ton of more books you might wanna check out – The Language Instinct, for instance, ranks pretty high on my Next Up list:
  • The Language Instinct
  • How the Mind Works
  • The Stuff of Thought

Matt Ridley

Speaking of optimistic people taking a Big Picture view of humanity, zoologist and science writer Matt Ridley is a must. Tall (like me!), Oxford-educated (like me!) and techno-optimist (like me!), no wonder I like him.

At last, How Innovation Works is schedule for May 2020. 

Nassim Nicholas Taleb

Oh, boy – here’s a controversial one. Frequently does he get into loud and hostile arguments with other high-profile intellectuals, and rarely does he pull any punches. His popular writing is found in the “Incerto” serie – the Latin term for ‘doubt’ or ‘uncertainty’ that capture Taleb’s core work. The set of books are together described as “an investigation of luck, uncertainty, probability, opacity, human error, risk, disorder, and decision-making in a world we don’t understand:”

They are intended to push One Big Idea: that we frequently overlook how random the world is, ascribing causality where none belongs and overestimate what we can know from (relatively recent) past events. Black Swans, the proverbial unpredictable event, dominates the social sciences in Taleb’s view. While the 2000-odd pages worth of the Incerto series may seem daunting, the books (and even the individual chapters) are designed not to fall very far from each other. The interested reader can, in other words, pick any one of them and work backwards in accordance with whatever is of interest. You wanna read all – or any – of them.

Having read Fooled by Randomness first, I’ve always held that highest. Be ready for a lot of sarcastic and frequently hostile (but thoughtful) objections of things you took for granted.

In sum: just bloody read more

Any selection of important contemporary intellectuals is arbitrary, highly skewed and super-unfair. There are more, many more, whose fantastic writings deserve attention. As I said, the eternal curse of modernity is our laughable inability to keep up with avalanche of cool stuff written every year.

As readers, we are overrun – and the only thing you can do to keep is is to read more. Read widely.

Above are some amazing thinkers. Drop me a line or tweet me with readings you would add to a list like this.

You’re Not Worth My Time

In our polarized and politically intolerant times, intellectuals worry about the divisions in our societies. You might call it inequality or absence of social mobility, racism or rigid social structures but all pundits seem to agree that despite our apparent cosmopolitanism, many people’s opinions on lifestyles, politics, or economics are diverging. More so, their opinions about others’ opinions is less accepting. We disapprove of people that believe the wrong things, and we shun them in favor of like-minded people.

Economists like Paul Collier (The Future of Capitalism), Raghuram Rajan (The Third Pillar), and Branko Milanovic (Capitalism, Alone) are producing well-publicized books about how the social world of our current societies are collapsing – “coming apart at the seams”, as Collier phrases it. A recent book on technology and the environment by MIT researcher Andrew McAfee, states the following:

more and more people are choosing to have fewer ties to people with dissimilar values and beliefs, opting instead to spend more time among the like-minded. The journalist Bill Bishop calls this phenomenon ‘the big sort’. (2019:227)

The observation could have come straight out Jonathan Haidt, a scholar I greatly admire. Why do we do this Bishop-style sorting? A common assessment is that having people challenging my beliefs hurts my identity and I don’t like it. We rather go for echo chambers.

Let me be contrarian and obnoxious for a minute and defend this Big Sort: is it really that bad to distance oneself from those with different views and opt for like-minded people?

The Irrelevance of Political Opinion

It’s long been recognized by social scientists that politics drive people apart (together with ‘Economics’, ‘Religion’ and ‘Abortion’, forming the acronym R.A.P.E, the avoidance of which is key to successful social conversations). From being friendly customers in a decentralized marketplace, politics urges us to become enemies and opponents, demands that we confiscate one another’s stuff rather than cooperate in creating value for each other. Bringing up your position on some labor market reform or the taxation of the rich (of which your familiarity is probably quite limited) is likely to deteriorate a relation rather than improve it.

Here’s the thing: Life is much more important than politics. Life is the experiences we’ve had, the sunrises we’ve seen, the friends and relationships we’ve had and lost and the stories that came with them. Not to mention the food we ate and the things we did. What your stance is on the environment or what you think the long-term consequences of QE is going to be are all very secondary issues. They might be much more interesting to those of us who care about such things, but for the majority of people, they remain pretty immaterial.

What happens when you trumpet these R.A.P.E. topics in your indecent search for like-minded people – or even an experience-widening tolerant search for opponents? Consider the typical, loud liberty-minded American; within five minutes in his (yes, his) presence, you know what his views are and he throws them in people’s faces whether they like it or not. Your group of acquaintances, likely consisting of people who couldn’t care less, get annoyed. While some people may engage in serious conversations about politics or economics (or religion or abortion) once in a while, their lives are generally concerned with more worthwhile topics. Having some loud-mouthed libertarian invade their everyday life with provocative statements and logical argument is not just annoying, it is bad manners.

I can lecture anyone and everyone I meet on the brilliancy or markets or how Scottish banks operated in the 18th century, with the sole outcome that I will have no friends or even acquaintances. Sharing your political and economic views rarely endear you to other people; it merely makes you a nuisance.

In short: Don’t be an arse. Stop ruining our great time with mindless, hurtful, harmful politics.

What about the perspectives and knowledge of others?

If you must invade others’ lives with your pesky politics, speaking to people with diverging opinions and different background might be interesting and fruitful. Key words “might be”. More accurate words: “is rarely”.

It is true that you might learn some exciting things from random strangers, but it’s unlikely. Most people are less informed about the world than I am (if you doubt that, ask your conversation partners to take Rosling’s Gapminder test) – what are they going to “teach” me but inaccuracies and misinformation…?

Sure, my car-loving friends can teach me something *fascinating* about some new car, a topic a could care less about. My baseball-crazy friends could recount the latest Sox game or why Tom Brady is the greatest – oh, ye, that’s a different sport. Soz. But is an environmentalist really going to teach me anything worth knowing about the impacts of climate change? (No, how could they – they don’t understand markets or even capitalism). Is an Occupy Wall Streeter going to lecture me about how financial markets work and what banks really do? How is my mother contributing to my perspectives on monetary policy when the sheer extent of her monetary wisdom comes from a novel where the ostensibly private Federal Reserve was purchased and controlled by some millionaire?

Don’t get me wrong: these are all amazing people that I highly cherish. I enjoy spending time with them and sharing stories about life. Point is: I’m under no illusion that they offer intellectually valuable perspectives that I could benefit from.

If I wanted to get such perspectives, I’d much rather spend time around two kinds of people: smart or curious. The majority of people you meet are neither:

Smart People are those who actually know things about the world, and I don’t meant boring things like why Israel celebrates this or that holiday, why the sky is blue (OK, that could be cool) or how one assembles a roof out of palm leaves. I mean a fair and favorable view of markets and a data-driven optimism. I mean a basic grasp of statistics. I mean a big picture understanding of what matters and the intellectual capabilities to explore them.

Curious people are those of whatever political persuasion that have thick enough skin to have their positions questioned and willing to reason to reach mutual understanding. One does not have to be smart or well-informed to be interesting – it’s enough to be sceptical and hungry for knowledge.

They rarely make ’em like that no more. So I take my probability-informed chances and avoid politically-minded people.

Elitist and Snobby?

Probably. But consider this: I have 24 hours a day, of which I sleep maybe 8. For maybe another 8 a day, I need to produce value, and so can’t be interrupted by loud and obnoxious libertarians (or environmentalists, or anthropologists or…). The last third of my days contain a lot of tasks: washing, workout, food, reading, wonders of the world. At best, it leaves a couple of hours a day for curious intellectual disputes. Statistically, I have another 56 years to live, for little over 60,000 hours worth of intellectual endeavors. There is an almost an endless supply of materials from interesting people out there – actually smart people: authors of books and journal articles, podcast interviews, lectures etc, all on topics that interest me. And more is produced every day. For every hour you take away from me with your “enriching perspectives” and uninformed opinion, I lose an hour of engaging with the treasure trove of actually smart people. Besides, the depth of their knowledge, the clarity of their formulation, the well-researched (and sourced!) material and examples they bring are almost certainly better than whatever you’re about to bring me. Consider the opportunity cost for me of having to listen to you “bumble-f**k your way through it“, as my beloved Samantha (Lily Collins) says in Stuck in Love. Even if you only take 10 minutes of my time, is whatever you’re about to say better than 1/360,000 of the sum of humanity’s current (and future) literary, statistic and economic treasure?

I don’t think so either. It’s simply not worth it.

This is a good reason to stick to people of similar mindset – people who are curious and open to having every argument re-examined, every proposition questioned. People with thick enough skin and sharp enough intellect not to mistake your objection for insult.

It’s not really the content of someone’s ideas that we’re shunning; it’s the intolerance and ignorance that we’re avoiding, carefully taking the opportunity cost into account. Talking to people who don’t share those views – the meta-views of intellectual discourse if you wish – is mostly a waste of time. The book on my desk is almost certainly more valuable.

With all due respect, you’re simply not worth my time.

Davies’ “Extreme Economies” – Part 2: Failure

In the previous part of this three-part review, I looked at Davies’ first subsection (“Survival”) where he ventured to some of the most secluded and extreme places of the world – a maximum security prison, a refugee camp, a tsunami disaster – and found thriving markets. Not in that pejorative and predatory way markets are usually denounced by their opponents, but in a cooperative, resilient and fascinating way.

In this second part, subtitled “The Economics of Lost Potential”, Davies brings us on a journey of extreme places where markets did not deliver this desirable escape from exceptionally restrictive circumstances.

There might be many reasons for why Extreme Economies has become a widely read and praised book. Beyond the vivid characters and fascinating environments described by Davies, this swinging between opposing perspectives is certainly one. Whether your priors are to oppose markets or to favour them, there is something here for you. Davies isn’t “judgy” or “preachy” and the story comes off as more balanced because of it.

If the previous section showed how markets flourish and solve problems even under the most strained conditions, this section shows how they don’t.

Darien, Panama

We first venture to the Darien Gap, the 160-kilometre dense rainforest that separates the northern and southern sections of the Pan-American Highway – an otherwise unbroken road from Alaska to the southern tip of Argentina.

To a student of financial history, “Darien” brings up William Paterson’s miserable Company of Scotland scheme in the 1690s; trying to make Scotland great (again?), the scheme raised a large share of scarce Scottish capital and spectacularly squandered it on trying to build a colony halfway around the world. In the first chapter of subsection ‘Failure’, Davies skilfully recounts the Darien Disaster, “Scotland’s greatest economic catastrophe” (p. 114).

Judging from Davies’ ventures into the jungle bordering Panama and Colombia, it wouldn’t be a far cry to call the present state of affairs a similar economic catastrophe. Rather than failed colonies, the failed potential of Darien lies elsewhere: its environmental challenges coupled with the trade and markets that failed to emerge despite readily available mutual gains for trade.

A stunning landscape of mile after mile filled with rainforests and rivers and the occasional lush farmland, the people of the Gap make a living through extracting what the land provides. If you’re deep into environmentalism, you might even say unsustainably so. Davies’ point is to illustrate a more well-known economic problem: when unowned or communally owned resources suffer from the tragedy of the commons – the tendency is for such resources to be overexploited and ultimately destroyed.

Whether through logging companies exceeding their quotas or locals chopping trees out of desperation to survive, the story in Darien is altogether conventional. At the edge of the Gap, “the people of Yaviza do what they can. [T]he environment is an asset, and for many people living in Yaviza getting by is only possible by chipping a bit off a selling it” (p. 120).

What’s striking here is that in times of need (as Davies himself showed in the chapter on Aceh) that’s exactly what we want assets to do! We can show this in down-to-earth, real-world examples like Acehnese women drawing on their jewellery as emergency savings, or in formal economic models such as the C-CAPM, the Consumption Capital Asset Pricing Model, familiar to every business and finance student.

On a much cruder level: if the mere survival of some of the poorest people on earth depend on chopping down precious trees – well, precious to far-away Westerners, anyway – accusing those people of destroying our shared environment is mind-blowingly daft. To rationalise that equation, you have to put a very large value on turtles and trees, and a very small value on human life.

Elinor Ostrom, whose Nobel Prize in economics was awarded to her work on common pool resources, emphasised three ways to solve tragedies of the commons: clear boundaries (i.e. individual property rights); regular communal meetings such that members can voice opinions and amicably resolve conflicts; a stable population so that reputation matters and we can socially police deviant behaviour (p. 125).

The Darien Gap has none of those. Property rights are routinely ignored; the forest includes many different populations (indigenous tribes, farmers, ex-FARC fugitives, illegal immigrants); and those populations fluctuate a lot, meaning that most interactions are one-shot games where reputation becomes useless. End result: extensive, illegal, unsustainable logging mixed with armed strangers.

What I can’t quite wrap my head around is that almost all (market and non-market) interactions that all of us have daily are with strangers: the barista, the people we walk past on the street, the new client you just met or the customer support agent you just talked to. All of them are strangers. A large share of interactions with other humans in the last few centuries of human societies have been one-offs, yet very few of them have spiral into the lawlessness that Davies describes in Darien. Be it the Leviathan, secure property rights, the doux commerce thesis or some wider institutional or cultural reason, but the failure of Darien to establish well-functioning formal and informal markets of the kind we saw in the book’s first part are intriguing.

While a fascinating chapter, it might also be Davies’ worst chapter, factually speaking. He claims, mistakenly, that “globally, deforestation continues apace with 2016 the worst year on record for tree loss”. On the contrary, we’re approaching global zero net deforestation. More specifically, Davies claims that Colombia and Panama are particularly at risk here, with rates deforestation “increased sharply”. A quick look through UN’s Global Forest Resource Assessment report (latest figures from 2015), these two countries are indeed chopping down their forests – but by less than any other time period on record.  Moreover, the Colombian net deforestation rate of 0.05% per year is easily exceeded by a number of countries; not even Panama’s dismal 0.3%/year (worse than the Brazilian Amazon) is particularly high in a global or historical perspective.

To make matters worse, the figure on p. 158 titled “The World’s Disappearing Tropics” might win an award for the most misleading graph of the year: by making the bars cumulative and downplaying the annual deforestation, it suggests that the forests are rapidly disappearing. The only comparison to relevant numbers (remember, Rosling teaches us to Always Be Comparing Our Numbers) is the tired “football pitches”. That’s hugely misleading. A vast amount of football pitches cleared in the Amazon this year still only amounted to 0.2% of the Brazilian Amazon; in other words, Brazilians could keep chopping down trees for a few good decades without making much of a dent to that vast rainforest.

davies

Moreover, the only reference point we’re given is that over a period of almost twenty years, an area the size of France has been deforested – but that’s equivalent to no more than one-tenth of only the Amazon forest, and the tropics have many more forested areas than that. The graph aims to intimidate us with ever-rising bars signalling the loss of forests; with some proper numbers and further examination it doesn’t seem very bad at all. On the contrary, locals (and yes, international logging companies) use the assets that nature has endowed them with – what’s so wrong with that?

Finally, the “missing market” that Davies observes in the Gap involves countless of illegal immigrants from around the world that trek through the jungles in search of a better life in the U.S. We have cash-rich Indians, willing to pay people to guide them through unknown and dangerous terrain, and local tribes and farmers and ex-FARC members with such knowledge looking for income; setting up a trade between them ought to be elementary.

Instead, it’s not: “in this place of flux,” writes Davies, “reputation does not matter, interactions are one-offs” (p. 137). Overturning the market quip that “trading is cheaper than raiding”, in the Darien Gap raiding is cheaper than trading. One might of course object that the failures of rich countries to offer more liberal immigration rules for people willing to go this far to get there illegally is hardly a market failure – but a failure of government regulation and incompetent bureaucracies.

Kinshasa, Democratic Republic of the Congo (DRC)

A 12-million people city sprawled on the banks of the Congo river, so unknown to Westerners that most of us couldn’t place it on a map. Democratic Republic of the Congo, the country with more people in extreme poverty than any other, is frequently described as “rich”. Or, with Davies’ euphemism “unrivalled potential” (p. 143).

Congo, the argument goes, has “diamonds, tin and other rare metals, the world’s second-largest rainforest and a river whose flow is second only to the Amazon. [it] shares a time zone with Paris [and the] population is young and growing”. It is one of the poorest countries but “should be one of the richest” (p. 143).

No, no and no. Before any other consideration of the remarkable day-to-day trading and corruption that Davies’ interview subjects describe, this mistaken idea about wealth must be straightened out. Wealth isn’t what could be if this or that major obstacle wasn’t in the way (Am I secretly a great singer, if I could only overcome the pesky fact that I have a voice unsuited for singing and lack practice?). This is almost tautological; what we mean by a country being poor is that it cannot overcome obstacles to wealth.

All wealth has to be created; humanity’s default position is extreme poverty.

And natural resources do not equate to wealth – there is even more support suggesting the opposite – in which case Japan and Singapore ought to be poor and Venezuela and DRC rich. My own sassy musings are still largely correct:

As Mises taught us half a century ago – and Julian Simon more recently – wealth (or even ‘goods’ or ‘commodities’ or ‘services’) are not the physical existence of those objects somewhere in the ground, but the satisfaction and valuation derived by the human mind. The object itself is only a means to whatever end the actor has in mind. Therefore, a “resource” is not the physical oil in the ground or the tons of iron ore in the Australian outback, but the ability of Human Imagination and Ingenuity to use those for his or her goals. After all, before humans learned to harnish the beautiful power of oil into heat, combustion engines and industrial production, it was nothing but a slimy, goe-y liquid in the ground, annoying our farmers. Nothing about its physical appearance changed over the centuries, but the mental abilities and industrial knowledge of human beings to use it for our purposes did.

Still, “modern Kinshasa is a disaster everyone should know about” (p. 172). No country has done worse in terms of GDP/capita since the 1960s. And we don’t have to go far to figure out at least part of the reason: the first rule of Kinshasa, says one of Davies’ interviewees, is corruption (p. 145). Everyone “steals a little for themselves as the funds pass through their hands, and if you pay in at the bottom of the pyramid there are hundreds of low-level tax officials competing to claim your cash.” (p. 185). Mobutu, the country’s long-time dictator, apparently said “if you want to steal, steal a little in a nice way” (p. 159).

Whether small stallholders at gigantic market or supermarket-owning tycoons, workers or university professors, pop-up sellers or police officers, everyone in Kinshasa uses every opportunity they can to extract a little rent for themselves – out of desperation more than malice. And everyone hates it: “The Kinoise”, writes Davies, “understand that these things should not happen, but recognize that their city’s economy demands a more flexible moral code.” (p. 168).

Interestingly enough, DMC is not a country whose state capacity is insufficient; it’s not a “failed state”, an “absent or passive” government whose cities are filled with “decaying official buildings and unfilled civil-service positions.” (p. 148). On the contrary:

The government thrives, with boulevards lined with the offices of countless ministries thronged by thousands of functionaries at knocking-off time. The Congolese state is active but parasitic, a corruption superstructure that often works directly against the interests of its people.

Poorly-paid police officers set up arbitrary roadblocks and extract bribes. Teachers demand a little something before allowing their pupils to pass. Restaurant owners serve their best food to their civil service regulators, free of charge, to even stay in business. Consequently, despite an incredibly resilient and innovative populace, “these innovative strategies are ultimately economic distortion reflecting time spent inventing ways to avoid tax collectors, rather than driving passengers or selling to customers” (p. 162).

But, like the ingenious monetary system of Louisiana prisons, the most fascinating aspect of Kinshasa’s economy is its use of money. Arbitrage traders head across the river to Brazaville in neighbouring Republic of the Congo equipped with dollars which they swap for CFAthe currency of six central African countries, successfully pegged to the euro. With ‘cefa’ they buy goods at Brazaville prices, goods they bring back over the river and undercut exorbitant Kinshasa prices. Selling in volatile and unstable Congolese francs carries risk, so Kinshasa’s streets are littered with currency traders offering dollars – at bid-ask spreads of less than 2%, comparing favourably with well-established Western currency markets. Before most transactions, Kinoise stop by an exchange trader sitting outside restaurants or malls, to acquire some Congolese francs with which to pay. Almost, almost dollarisation.

In Kinshasa, people rely on illegal trading as a safety net when personal disaster strikes or the state’s required bribes become too extortionary. Davies’ point is a convincing one, that “a town, city or country can get stuck in a rut and stay there” (p. 174).

Judging from his venture into Kinshasa, it’s difficult to blame markets for that. I don’t believe I’m invoking a No True Scotsman fallacies by saying that a market whose participants spent half their time avoiding public officials and the other half bribing them to avoid arbitrarily made-up rules, is pretty far from a free market.

Believing the opposite is also silly – that markets and mutual gains from trade can overcome any obstacles placed before them. Governments, culture or institutions have power to completely eradicate the beneficial outcomes of markets – Kinshasa’s extreme poverty attests to that.

Glasgow, the last part of ‘Failure’, is discussed in a separate post.

Davies’ “Extreme Economies” – Part 1: Survival

Late to the party, I relied on the quality-control of the masses before I plunged into Richard Davies’ much-hyped book Extreme Economies: Survival, Failure and Future – Lessons from the World’s Limits (see reviews by Diane Coyle and Philip Aldrick). I first heard about it on some Summer Reading List – or perhaps Financial Times’ shortlist for best books of 2019. What really prompted me to read it, however, was an unlikely source: The Guardian’s long-read in late-August. Davies adopted his Louisiana Prison chapter and described the intricate ways prisoners and guards in maximum-security prison Louisiana State Penitentiary (“Angola”) exchange value using the top-up debit card Green Dot and single-use MoneyPak cards. I was hooked.

Davies’ captivating and personal writing in that 4000-word piece made me want to read the full thing. Once I got around to it, I couldn’t put it down – which is the best compliment an author can get. At little over 400 pages of easy non-jargon prose, it doesn’t take too long to get through – and the nine case-study chapters can easily be read on their own. Further attesting to the brilliance of the book are the many questions it raised with me, insights to investigate further.

The book’s structure is simple to follow: three themes ‘Survival’ (“The Economics of Resilience”), ‘Failure’ (“The Economics of Lost Potential”) and ‘Future’ (“The Economics of Tomorrow”), each containing three fascinating places, wrapped between an introductory and a concluding chapter.

The motivation for the book is a mixture of John Maynard Keynes and a Scottish 19th century civil engineer named David Kirkaldy. The latter’s big idea was studying “why materials buckled and bent under pressure” (p. 31); to fully grasp the potential for something, we need to examine why they fall apart. From Keynes Davies took the idea that the future is already partly here:

“We can get a glimpse of the future today, if we know where to look. The trick was to identify a sustained trend – a path most people are following – and look at the lives of those experiencing the extremes of that trend. […] to zoom forward in time, he said, we need to find those whose lives are like this already.” (p. 31)

Davies ventures to nine places of the world, all extreme in some aspect, and investigates the everyday economic challenges that people face and the ingenious ways in which they do – or do not – solve them. By carefully looking at the present, he posits to gauge something about the future.

In this first part – ‘Survival’ – I look at Davies’ three selections (Aceh, Indonesia; Zaatari, Jordan; and Louisiana, U.S.). The next part contains the case studies of ‘Failure’ (Darien, Panama; Kinshasa, DRC; Glasgow, Scotland) and the concluding part looks at ‘Future’ (Akita, Japan; Tallinn, Estonia; and Santiago, Chile). As I have personal experience of living in two of these places while knowing virtually nothing about many of the others, I reserve some complementary reflections on Glasgow and Santiago when appropriate.

Aceh, Indonesia

On Dec 26, 2004, an Indian Ocean earthquake created a tsunami that devastated coastlines from Thailand to Madagascar. Two-thirds of the 230,000 human lives lost were in Indonesia, mostly in the Aceh province on the northern tip of Sumatra, closest to the earthquake’s epicentre. Pictures taken before and after show how complete the destruction was; except for a few sturdy mosques, nothing was left standing.

A few years later, the busy streets and crowded beaches were pretty much back to normal. How?

Davies’ story does not emphasise aid flows or new investment by outsiders, but “informal systems of trade, exchange and even currency” (p. 49), an aspect that generally “goes unmeasured an unassessed” (p. 65). Aceh’s catastrophe is a story of human resilience and of intangibles.

The people Davies interviewed told him how the ancient Aceh practice of keeping savings in wearable and portable gold – necklace, rings, bangles – provided survivors who had lost everything with a source of funds to draw on. Importantly, a gold dealer told him, as the market price of gold is set internationally, the massive sell orders coming in simultaneously did not affect prices very much. Additionally, the dealer’s knowledge of market prices and contacts in Jakarta allowed him to quickly set up his business again. Buying Acehnese’s gold during those crucial months, way before foreign aid or government could effectively respond, provided people with funds to rebuild their lives. Traditional practices “insulated Aceh and provided its entrepreneurs with rapid access to cash” (p. 49).

Another insightful observation is the role played by intangibles – the knowledge of how and where and when that most of our economies depend on. Sanusi, 52-year-old coffee trader, lost everything: his shop, his equipment, his family. Amid his devastation he realized that one thing that the tsunami had not destroyed was his knowledge of the coffee business – where to source the best beans, how to make it, where and when to sell the coffee. He patched together some spare planks, used his business contacts to provide him with trade credit and had his rudimentary coffee business set-up in time for the arrival of coffee-drinking construction and aid-agency workers.

Davies also gives us a very balanced GDP discussion here, as the years after the December 2004 disaster saw huge GDP growth. Most economists would reflexively object and invoke Bastiat’s Broken Window Fallacy. Yes, Davies is well aware, but he’s getting at something more subtle:

“GDP aims to capture what a country’s residents are doing now, rather than what they have done previously. [It is] all about current human activities – spending, wages, income, producing goods – rather than the value embodied in physical assets such as building and factories. Far from being a mean or cold measure, economists’ favourite yardstick is a fundamentally human one.” (p. 53, 65)

To GDP, what you produced in the past is of no consequence. Clearly, when the tsunami devastated the coastline of Aceh, killing hundreds of thousands of people in the process and wiping away houses, factories and equipment, that made everyone poorer – their assets and savings and capital were literally washed away. Considering the massive construction boom that followed, only partly financed by outside aid and government money, it is not incorrect to say that GDP boomed; it is only incorrect to believe that people were made better off because of the disaster. Bastiat teaches us that they were not.

I think of this as the difference between your total savings (in cash, stocks, bank accounts, houses, jewelry) and your monthly income, a difference between “stock” and “flow”. If, like many Acehnese that Davies interviewed, your earnings-potential depend on your knowledge of your industry, your most valuable assets remain untouched even after a complete disaster. Your savings – your capital, your stuff – are completely eradicated, but the basis for your future income remains intact. With some minor equipment – a trade credit, some furniture, a shop patched together with flotsam – you can quickly approach the production and income you had before. GDP attempts to measure that income – not the current value of total assets.

“The people here,” Davies concludes, “lost every physical asset but the tsunami survivors retained skills and knowledge from before the disaster, and rebuilt quickly as a result.” (p. 66).

Zaatari, Jordan

Following the Syrian civil war and its exodus of refugees, camps were set up in many neighbouring countries. Often run by the UN, these camps ensure minimum survivability and life-support for refugees and are rather centrally-planned; the UNHCR hands out blankets, assigns tents and provides in-kind goods and services (food, medicine etc).

In April 2013, the Zaatari camp in the northern Jordan desert had grown to over 200,000 inhabitants, with daily inflows of up to 4,000 refugees. It was too much – and the UNHCR “ran out of manpower” (p. 70). They rationalised operations, focused on their core tasks – and left individuals alone to trade, construct and flourish on their own. It became a lesson in anarchic cooperation and of the essentiality of markets – and, like the Louisiana prison economy below, an ingenious monetary system.  It “did not happen by design, but by accident”, Davies writes, and constitutes “an economic puzzle worth unpicking” (p. 72) only if you doubt the beneficial consequences of markets and free people. If you don’t, the result is predictable.

Every month, the Zaatari camp administrators load up payment cards for the refugees with 20 dinars (£23) per person, spendable only in the two camp supermarkets. Designed to be a cashless economy, the money flowed directly from donors to the supermarkets: “refugees cannot transfer cash between wallets, so aid money designated for food cannot be spent on clothes, and the winter clothing allowance cannot be spent on food” (p. 79).

This extreme and artificial economy teaches us something universal about markets; imposed orders, out of touch with market participants’ demands, malfunctions and create huge wastes. Complete monetary control by outsiders, Davies writes, “fails the basic test of any well-functioning market – to be a place where demand meets supply” (pp. 80-81). Supermarkets lacked the things refugees wanted, and they stocked up on things that reflected kickbacks to donor countries (Italian spaghetti or Brazilian coffee), entirely out of sync with Syrian cuisine and preferences. And the unorganic, artificially-set prices were entirely detached from the outside world.

Yet, the refugee city of Zaatari is a flourishing economy where people build, make and trade all kinds of things. How did this happen? Innovative Syrians found a way around their monetary restrictions: the economy of Zaatari “rests on the conversion of homes to business and flipping aid credit, via smuggling, into hard cash” (p. 88). Informal and free markets, at their best.

Along most of the camp’s boundaries, there are no fences, only roads – and the huge number of children playing ball games on the concrete roads or running in and out of the camp, makes identifying who’s a refugee and who’s a teenage smuggler next to impossible. What the refugees did was:

  • buy some item in the supermarket using the e-card credits provided by UNHCR
  • sell it to smugglers for less than their outside market value and obtain hard cash in return
  • smugglers slip out of the camp and sell the goods to Jordanians and other driving past, taking a cut for themselves.

Bottom line: refugees turned 20 dinars of illiquid and restricted e-credit into hard cash, spendable on anything anywhere in the camp. The productive powers of 200,000 refugees was unleashed. In Zaatari, the presence of smugglers allowed large-scale interactions with the outside world – and so the artificially-created closed-loop payment system did not remain closed. Instead, it was connected to the outside Jordanian economy through smuggling!

The take-away point is to cherish market activities, even informal ones, since they “matter to everyone and are fundamentally human” (p. 102). Governments plan and creates problems; markets solve them.

Louisiana State Prison

Analogous to the Zaatari refugees, prisoners in Louisiana’s maximum-security prison (“Angola”) find themselves in a similar economic squeeze: unsatisfied demand and large shortage of goods, artificial constraints on what prisoners can and cannot own. Prisons are places where official prices don’t work: paltry “incomes” through mandatory work stand in no relation to the officially-mandated prices of goods that prisoners can buy at commissary. Accusations of modern slavery comes to mind. The “official price system,” Davies writes, “has been intentionally broken” (p. 119).

To escape their formal and restricted economy, prisoners have long relied on smuggling. Radford’s famous article about cigarettes becoming money in a WWII Prisoners-of-War camp applied – until Angola officials decided to ban tobacco from the premises. Cash too risky to hold; age-old money banned. What now? Fintech to the rescue!

Louisiana prisons “have a remarkable new currency innovation, something far better than tobacco or cans of mackerel”. Physical dollar bills are not handled, bank accounts that leave digital traces are not linked to individuals: “people pay each other with dots”, says an ex-convict that Davies interviewed (p. 132).

Contrary to the belief that smuggling into prisons happen through corrupt prison guards only, prisoners have some power; they can stage riots or make guards’ everyday-life very hard by misbehaving in every imaginable way. That power gives prisoners and guards alike incentives to trade with another – but prisoners don’t have anything to offer, apart from occasional or indivisible services like car repairs or (like Andy Dufresne in the movie Shawshank Redemption) accounting services. And paying guards in commissary products is not gonna cut it.

Here’s how Angola prisoners solved their monetary constraints, obtaining means of payment to smuggle in items their economy’s participants demanded:

  • set up an account with Green Dot, providing a pre-paid debit card without requirements of ID or proof of address.
  • buy a second card, a single-use scratch card called MoneyPak, used to load the first card with anywhere between $20 and $500. These cards are usable anywhere that accepts VISA and Mastercards, and easily bought/cashed out at Walmarts or pharmacies.
  • Scratch away MoneyPak’s 14-digit number (“the dots”), and transfer those digits to somebody else, be it another prisoner or guard.
  • that person goes online, logs into their Green Dot account, enters the combination and credit is added to their debit card.

The dots, Davies describes, “are a currency close to cash: an instant, simple and safe transfer of value over long distance” (p. 134). Even prison economies, argues Davies, “show that the human urge to trade and exchange information is impossible to repress” (p. 136).

The Economics of Resilience

The power of informal economies are great – and essential to people cut off from regular economic processes. Through natural disasters, in refugee camps or in prisons, innovative people find ways around their imposed-upon constraints and “establish a trading system if theirs is damaged, destroyed or limited in some way”. (p. 135)

Aceh, Zaatari and the Angola prison show “three places where markets, currencies, trade and exchange exist despite all odds.” (p. 139).

Musings on opinions: de gustibus non est disputandum

A well-known Latin adage reads “de gustibus non est disputandum”, roughly translated as “about tastes it should not be disputed”. In English, we usually refer to the maxim as “over tastes there is no argument”, indicating the economist’s fundamental creed that tastes and preferences may very well come from somewhere but are useless to argue over. We can’t prove them. We can’t disavow them. Ultimately, they just are and we have to live with that.

In November last year, ridiculing a prominent Swedish politician, I used the example of ice-cream flavours to illustrate the point:

“I like ice-cream” is an innocent and unobjectionable opinion to have. Innocent because hey, who doesn’t like ice-cream, and unobjectionable because there is no way we can verify whether you actually like ice-cream. We can’t effortlessly observe the reactions in your brain from eating ice-cream or even criticize such a position.

Over tastes there is no dispute. You like what you like. We can theorize all we want over sociological or cultural impacts, or perhaps attempt to trace biological reasons that may explain why some people like what they like – but ultimately we must act in the world (Proposition #1) and so we shrug our shoulders and get on with life. We accept that people believe, like, and prefer different things and that’s that.

Being strange rationalising creatures, you don’t have to scratch humans very deeply before you encounter convictions or beliefs that make no sense whatsoever. Most of the time we’re talking plainly irrational or internally inconsistent beliefs, but, like most tastes and political opinions, they are very cheap to hold – you are generally not taxed or suffer noticeable disadvantages from holding erroneous or contradictory beliefs. Sometimes, by giving the speaker social kudos for believing it, the cost of holding an erroneous belief might even be negative – portraying openly it gives us benefits with our in-group. (yes, we’re all Caplanites now).

Let’s continue the “what to eat” comparison since, apparently, the personal is political and recently what I eat seems to be everybody else’s business too.

When I make a decision in the world (as I must to stay alive, Proposition #1), I occasionally feel the urge to explain that choice to others – because they ask or because I submit to the internalised pressure. I might say “eating ice-cream is good for me” (Proposition #2a).

Now, most people would probably consider that statement obviously incorrect (ice-cream is a sweet, a dessert; desserts make you fat and unhealthy, i.e. not good for you). The trouble is, of course, that I didn’t specify what I meant by “good for me”.  It’s really unclear what that exactly means, since we don’t know what I have in mind and what I value as “good” (taste? Longevity? Complete vitamins? How it makes me feel? Social considerations?).

This version of Proposition 2a therefore essentially reverts back to a Proposition 1 claim; you can like whatever you want and you happen to like what ice-cream does to you in that dimension (taste, feeling, social consideration). Anything still goes.

I might also offer a slightly different version (Proposition #2b) where I say “eating ice-cream is good for me because it cures cancer”.

Aha! Now I’ve not only given you a clear metric of what I mean by ‘good’ (curing cancer), I’ve also established a causal mechanism about the world: ice-cream cures cancer.

By now, we’ve completely left the domain of “everything goes” and “over tastes there is no argument”. I’m making a statement about the world, and this statement is ludicrous. Admittedly, there might be some revolutionary science that shows the beneficial impacts of ice-cream on cancer, but I seriously doubt it – let’s say the causal claim here is as incorrect and refuted as a claim can possibly be.

Am I still justified in staying with my conviction and eating ice-cream? No, of course not! I gave a measure of what I meant by ‘good’ and clear causal criteria (“cure cancer”) for how ice-cream fits into that – and it’s completely wrong! I must change my behaviour, accordingly.

If I don’t change my behaviour and maintain enjoying my delicious chocolate-flavoured ice-cream, two things happen: First, I can surrender my outrageous claim and revert back to Proposition 1. That’s fine. Or I can amend Proposition 2b into something more believable – like “eating ice-cream makes me happy, and I like being happy”.

What’s the story here?

If we substitute ice-cream for – I posit with zero evidence – the vast majority of people’s beliefs (about causality in the world, about health and nutrition, about politics, about economics and religion), we’re in essentially the same position. All those convictions, ranging from what food is good for you, to how that spiritual omnipotent power you revere helps your life, to what the government should do with taxes or regulations to reduce poverty, are most likely completely wrong.

Sharing my own experiences or telling stories about how I solved some problem is how we socially interact as humans – that’s fine and wonderful, and essentially amounts to Proposition 1-style statements. If you and I are sufficiently alike, you might benefit from those experiences.

Making statements about the world, however, particularly causal relations about the world, subjects me to a much higher level of proof. Now my experiences or beliefs or tastes are not enough. Indeed, it doesn’t even matter if I invoke the subjective and anecdotal stories of a few friends or this or that family member. I’m still doing shit science, making claims about the world on seriously fragile grounds. It’s not quite Frankfurt’s “Bullshit” yet, since we haven’t presumed that I don’t care about the truth, but as a statement of the world, what I’m saying is at least garbage.

I am entitled to my own beliefs and tastes and political “opinions“, whatever that means. I am not, however, entitled to my own facts and my own causal mechanisms of the world.

Keeping these spheres separate – or at least being clear about moving from one to the other – ought to rank among the highest virtues of peaceful human co-existence. We should be more humble and realise that on most topics, most of the time, we really don’t know. But that doesn’t mean anything goes.

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)

(4): ‘Bitcoin’s Fixed Money Supply Is a Weakness’, Joakim Book, AIER (2019-08-28)

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.

Financial History to the Rescue: On Bitcoiners’ Many Troubles

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

(2): ‘Rothbard’s First Impressions on Free Banking in Scotland Were Correct’, Joakim Book, AIER (2019-08-18)
(3): ‘The Harder Money Wins Out’, Joakim Book, NotesOnLiberty (2019-08-19)
(4): ‘Bitcoin’s Fixed Money Supply Is a Weakness’, Joakim Book, AIER (2019-08-28)

It is unfair to expect technologically savvy bitcoiners to also be apt and well-read monetary economists. By no means do the skills and experiences of either have to overlap. Through the rise of Bitcoin with its explicit central banking challenge and attempt to become a worldwide currency, the subject matter of the two groups has unexpectedly clashed. All arguments that support or attack bitcoin is a head-first dive into monetary economics – sometimes exhuming centuries-long disputes among monetary economists and often blatantly distorts and overlooks money and banking arrangements of the past.

We can’t have that, can we.

One of the most delightful events in the libertarian world is the monthly Soho Forum debate run by Gene Epstein. Yesterday’s splendid showdown between Profs. George Selgin and Saifedean Ammous on the suitability of Bitcoin as a Medium of Exchange is bound to get some serious traction once the recording is on available only – look out for that!

A great debate for anyone interesting in monetary system and monetary economics more generally, this was probably the best and most entertaining of many Soho Forum debates I’ve watched. It’s a good format that forces speakers to engage and respond to one another’s arguments, which makes a two-hour conversation on something as technical and intricate as Bitcoin’s monetary role an absolute delight; even those of us deep into this nerdy rabbit hole can learn a lot and walk away with a trove of inspiration.

Channeling that inspiration into long-form, multi-part reviews of the relevant financial and monetary history is exactly what I’m going to do!

One question I often get regarding my research interests (banks, money and financial markets in the past) is the mildly offensive but absolutely correct question to ask: who the f— cares?! Bitcoin and the question of monetary regimes are perfect examples that make financial history relevant: the rise of crypto questions the fundamentals of monetary systems, systems that very rarely change. Naturally, the financial historian has an edge here, having a lot more nuanced knowledge about past monetary and financial arrangements and their operations. History becomes our (only) laboratory, to which the financial historian typically has a lot to contribute.

Moreso than other topics, fundamental questions of monetary regimes are explicitly pitted against other possible regimes – by their nature comparative and always informed by historical experience. It takes about two-and-a-half sentences before debates over money invoke some reference to financial and monetary history – as they should, since they illustrate how some (aspect of) a different monetary regime worked. Frustratingly enough, there’s a good chance that the speaker has mindboggingly little idea of what s/he’s talking about!

That’s where I like to come in. To a roomful of aspiring monetary economists at Cato’s Alternative Money University in July this year, Randall Wright‘s response to why he does monetary economics at all (“to debunk all this B-S!”) generalizes pretty well.

I’m gonna use this post to review some of the mistakes Saifedean made yesterday – and use it going forward as an updated collection of future posts on the topic, especially as I go through Saif’s promising book, The Bitcoin Standard: The Decentralized Alternative to Central Banking. The aim here is to respectfully clarify the parts of the Bitcoin arguments where I’d like to think that I have a comparative advantage – financial and monetary history – and to better develop my understanding of the monetary theory involved.

Here are some points that came up yesterday:

  • The Monetary Progression of ‘Harder Money’: the brilliance of the past is that almost any account, no matter how persuasive and compelling, is bound to run into inconvenient historical facts. The world is more nuanced than can be reasonably captured by pithy generalization (yes, I realize the irony here). In a piece attacking this bitcoiner’s creation myth earlier this year, I wrote:

This progressively upward story is pretty compelling: better money overtake worse money until one major player unfairly took over gold – the then-best money – replacing it with something inferior that the Davids of the crypto world now intents to reverse. […] Too bad that it’s not true. Virtually every step of this monetary account is mistaken.

  • The Lender-of-Last-Resort role privately provided: Many Austrians and opponents to fractional reserve banking routinely believe that banks holding less-than-100% reserve against their deposits must have a government backing them, providing emergency liquidity when such banks are inevitably run upon. This is completely false. I can point to many different historical instances that privately accounted for such risks, from private clearinghouses to insurance, to the option-clause debate in Scottish Free Banking and contingent/unlimited liability institutions.
  • …which leads us to Scottish Free Banking. There’s a famous quip by Rothbard (“Rothbard’s Law“) that describes the tendency for economists to specialize in the fields they’re worst at: Henry George specialized in land, where his writing is appalling; Milton Friedman on Money, where he’s awful etc. I usually say that the same thing applies for Rothbard whenever he writes on Financial History. Very bad. And yes, I will go through his article ‘Myth of Free Banking in Scotland’
  • Saif made a distinction yesterday between the “Medium of Exchange” and the “Payment Mechanism” involved that struck me as misleading, and I didn’t get a chance to finish my reasoning with him in person – so I’ll flush it out in a piece later on. Happily for all you Free Banking fans, it involves note-issuing Scottish banks and the bigger questions of redeemability and outside/inside money.

Some additional housekeeping from yesterday:

  • Saif: “There was no real estate bubble on the Gold Standard”.
    • Yes, Selgin said, the Florida 1920s housing bubble leading up to the Great Depression. No, Saif correctly objected, that wasn’t a real gold standard, but a central bank-planned Gold Exchange Standard.
      Ok, fine – I’d agree with Saif here. How about the 1893 Australian banking crisis? Classical Gold Standard, no central bank, but a property boom and bubble-like collapse nonetheless.
    • A response might be “but fractional reserve banking!” but a) that’s a topic I’ll delve into much more, and b) this is started to sound like a No True Scotsman fallacy…
  • Saif: “Central banks hold gold – they don’t trust each other enough to hold currency”
    • Saif probably misspoke here, since he couldn’t possibly believe this; looking at any central bank’s balance sheet would instantly dispell such beliefs. Central banks generally hold no more than 5-8% of their assets in gold, and often a lot more than that in foreign currency-denominated asset. The ECB holds about equal parts (7-8% of assets) in gold and foreign currency. I routinely follow the weekly changes in the Riksbank’s balance sheet and even after a more extreme QE programe than the Fed’s (as % of GDP), it holds more FX than it does SEK-denominated assets (and no more than 5% in gold). The Bank of England technically doesn’t actually have any gold at all on its balance sheet, but holds gold in storage at its vaults (on behalf of other countries and the UK Treasury).

Bear with me over the next few months, as I make my way through Saif’s book and engage with these thrilling debates. Feel free to interrupt/comment on Twitter at any point if you think I’ve made a factual/empirical error, error in reasoning or in relevance to Bitcoin.

And yes, keep in mind that this is a respectful inquiry into fascinating topics with people who agree on like 92% of everything. Feel free to call me out for unnecessarily snarky and offensive thing as we go along – and welcome to the party!