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)

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!

Eye Candy: Antarctica’s countries

NOL map Antarctica countries
Click here to zoom

There are a total of 29 countries with scientific programs aimed at Antarctica.

Here is more at NOL on Antarctica. Brrrrrr!

Nightcap

  1. Regional politics is restraining Kurdish militancy in Iran Fazel Hawramy, Al-Monitor
  2. Ignoring Ayn Rand won’t make her go away Skye Cleary, Aeon
  3. Culture and Institutions Alesina & Giuliano, Journal of Economic Literature
  4. Medieval Robots: Magic, Nature, and Art Dylan Cahn, Origins

The minimum wage induced spur of technological innovation ought not be praised

In a recent article at Reason.comChristian Britschgi argues that “Government-mandated price hikes do a lot of things. Spurring technological innovation is not one of them”. This is in response to the self-serve kiosks in fast-food restaurants that seem to have appeared everywhere following increases in the minimum wage.

In essence, his argument is that minimum wages do not induce technological innovation. That is an empirical question. I am willing to consider that this is not the most significant of adjustment margins to large changes in the minimum wage. The work of Andrew Seltzer on the minimum wage during the Great Depression in the United States suggests that at the very least it ought not be discarded.  Britschgi does not provide such evidence, he merely cites anecdotal pieces of support. Not that anecdotes are bad, but those that are cited come from the kiosk industry – hardly a neutral source.

That being said, this is not what makes me contentious towards the article. It is the implicit presupposition contained within: that technological innovation is good.

No, technological innovation is not necessarily good. Firms can use two inputs (capital and labor) and, given prices and return rates, there is an optimal allocation of both. If you change the relative prices of each, you change the optimal allocation. However, absent the regulated price change, the production decisions are optimal. With the regulated price change, the production decisions are the best available under the constraint of working within a suboptimal framework. Thus, you are inducing a rate of technological innovation which is too fast relative to the optimal rate.

You may think that this is a little luddite of me to say, but it is not. It is a complement to the idea that there are “skill-biased” technological change (See notably this article of Daron Acemoglu and this one by Bekman et al.). If the regulated wage change affects a particular segment of the labor (say the unskilled portions – e.g. those working in fast food restaurants), it changes the optimal quantity of that labor to hire. Sure, it bumps up demand for certain types of workers (e.g. machine designers and repairmen) but it is still suboptimal. One should not presuppose that ipso facto, technological change is good. What matters is the “optimal” rate of change. In this case, one can argue that the minimum wage (if pushed up too high) induces a rate of technological change that is too fast and will act in disfavor of unskilled workers.

As such, yes, the artificial spurring of technological change should not be deemed desirable!

Tech’s Ethical Dark Side

An article at the NY Times opens:

The medical profession has an ethic: First, do no harm.

Silicon Valley has an ethos: Build it first and ask for forgiveness later.

Now, in the wake of fake news and other troubles at tech companies, universities that helped produce some of Silicon Valley’s top technologists are hustling to bring a more medicine-like morality to computer science.

Far be it from me to tell people to avoid spending time considering ethics. But something seems a bit silly to me about all this. The “experts” are trying to teach students the consequences of the complex interactions between the services they haven’t yet created and the world as it doesn’t yet exist.

My inner cynic sees this “ethics of tech” movement as a push to have software engineers become nanny-state-like social engineers. “First do no harm” is not the right standard for tech (which isn’t to say “do harm” is). Before 2016 Facebook and Twitter were praised for their positive contribution to the Arab Spring. After our dumb election the educated western elite threw up our hands and said, “it’s an ethical breach to reduce our power!” Freedom is messy, and “do no harm” privileges the status quo.

The root problem is that computer services interact with the public in complex ways. Recognizing this is important and an ethics class ought to grapple with that complexity and the resulting uncertainty in how our decisions (including design decisions) can affect the well being of others. My worry is that a sensible call to think about these issues will be co-opted by power-hungry bureaucrats. (There really ought to be ethics classes on the “Dark Side of Ethical Judgments of Others and Education Policy”.)

I don’t doubt that the motivations of the people involved are basically good, but I’m deeply skeptical of their ability to do much more than offer retrospective analysis as particular events become less relevant. History is important, but let’s not trick ourselves into thinking the lessons of 2016 Facebook will apply neatly to whatever network we’re on in 2026.

It hardly seems reasonable to insist that Facebook be put in charge of what we get to see. Some argue that’s already the world we live in, and they aren’t completely wrong. But that authority is still determined by the voluntary individual decision of users with access to plenty of alternatives. People aren’t always as thoughtful and deliberate as I’d like, but that doesn’t mean I should step in and be a thoughtful and deliberate Orwellian figure on their behalf.

Is planned obsolescence a good thing?

There is this recurring argument that goods don’t last as long today as they did fifty years ago. My father berated me a few months ago about my economics by saying that back in his time, goods lasted longer. I questioned his data (there are signs that goods last as long as they did twenty or thirty years ago). This new ATTN video on Repair Cafes would have caused my father to rejoice greatly. However, I am going to ask a question here and go a step further: is planned obsolescence the symptom of a good thing?

Here is my argument (feel free to throw rocks after).

Improving the lifespan of a good requires a greater level of inputs which increases the marginal costs of the good. Producing a higher-quality good basically shifts the supply curve leftwards. Basically, we pay a little more for something that lasts longer. However, if we are living in a world of rapid technological innovation, what is the point of expending more resources on a good with a twenty-year lifespan but which will be obsolete two years?

Take my previous iPhone – it lasted three years before it simply decided to not work. In the three years between my old phone and my new phone, there was a rapid change in quality: more memory, better camera, faster processing, better sound. Imagine that Apple had invested billions to increase the life of my iPhone from three to nine years. Would I have bought that phone? In all honesty, it would depend on the price increase but the answer would have been closer to “no” than to “yes”. So in a way, Apple reaches a marginal consumer like me by lowering the price and turns me into a technology adopter. However, let’s imagine this from Apple’s perspective. Its in a race for its life against competitors who keep inventing new widgets and features that change the manner in which we consume. So, its choice is the following:

A: Increase lifespan, higher marginal costs and a leftward shift of supply that causes slightly higher prices and less demand. These resources cannot be expended on R&D and innovation
B: Shorten lifespan, lower marginal costs, lower prices, more goods consumed; more resources on R&D and innovation.

If everyone is inventing rapidly, then B is the dominant strategy. If innovation is zero, A is the dominant strategy. Basically, in a Schumpeterian world like I am describing, the short lifespan of goods is a symptom of great innovations and better days to come.

What do you think?

 

Pornography, virtual reality and censorship [II]: puritanism and videogames

[Continuing from my last post, noting that feminists have not behaved monolithically toward pornography, and statistics have not provided any justifiable inference from violent pornography to violent crime.]

Most feminists would align, however, in a condemnation of violent pornography, even if they do not attempt to use legal coercion to restrict it. It has been particularly controversial when material becomes first-person, or even playable. And thus pornography, and violent pornography, often makes an intersection with the videogame industry. To name one infamous example, RapeLay, a role-playing game from a company in Yokohama, Japan, allows the player to assault a defenseless mother and her two children. Some critics argued that the videogame breached the Convention on the Elimination of All Forms of Discrimination Against Women, agreed to by the United Nations.

New York City Council speaker Christine Quinn called RapeLay a “rape simulator.” Commenting on the game and other controversies, an IGN journalist added: “For many, videogames are nothing but simulators. They are literal replications, and, as such, should be cause for the same kind of alarm the real life equivalents would inspire.” Is this the same motive for consumers though – that of, essentially, practice? On the piratebay download link for RapeLay, a top commenter “slask777” writes: “I highly approve of this for two reasons, [sic] the first is that it’s a slap in the face of every prude and alarmist idiot out there and second, it’s a healthy outlet for the rape fantasy, which is more common than most people believe.”

I suspect that much of the appreciation for videogames is due to their simplicity, to be eventually supplemented by mild and mostly innocent addiction. Then – not to put too much faith in slask777’s psychological credentials – I suspect as well that violent videogames serve a “channeling” function, allowing some instinctual energies to exert themselves in a harmless environment and release some psychological tension. Perhaps the “rape fantasy” is not shared by the majority of the populace, but judging by the comments on the torrent site, the audience for this game cannot be confined to stereotypical images of basement N.E.E.Ts. (Studies of the occupations of internet trolls confirm as well the difficulty of pinning down an image for anonymous internet users). There was even an informative, civil discussion of reproductive anatomy on page one of the torrent site. Following this theory of channeling, we might find similar uses for virtual realities: nonreal locations to perform socially unacceptable acts. Locations for people with genuine sexual or sadistic pathologies, to release their desires and blow off steam without harming other people. The entire premise is empathetic.

Of course, throughout history, any activity which has the possibly of harmlessly releasing what could be described as primordial man, the “reptilian” side, the repressed id, or whatnot, has faced violent opposition from culture, religion, criminal law and various romantic-familial-social apparatuses. Here, we can already expect that, fitting into the category of “recreational and individuational,” virtual reality technologies will face a cultural blowback. RapeLay is an extreme example of both violence and sexuality in videogames: the high-profile protest it received could be expected. (Pornography has even been to the Supreme Court a few times (1957, ’64, ’89). In a separate case, Justice Alito, commenting on RapeLay, wrote that it “appears that there is no antisocial theme too base for some in the videogame industry to exploit.”) This moral outrage, however, is not simply content-based, but medium-based, and flows directly from the extant condescension and distrust toward videogames and pornography.

The simple fact that disparate ideological camps agree on, and compatible groups disagree on, the effects and what to do about pornography and videogames could be seen as demonstrative of the issue’s complexity; in fact, this implies that the nature of opinion on this is fundamental and dogmatic. The opinion provides the starting point for selectively filtering research. There are two logical theories concerning these violent media: the desensitization argument, and the cathartic/channeling argument. Puritans and rebels enter the debate with their argumentative powers already assigned, and the evidence becomes less important.

Before evidence that might contradict either primitive position on pornography interferes, many people have already formed their condescension and distrust. The desensitization theory is particularly attractive due on the most publicly-understood thesis of cognitive-behavioral psychology: mental conditioning. Thus when violence or abusive language is used as a male advance in adult videos and games, and women are depicted as acquiescing rather than fighting back, boys must internalize this as reality. Of course, media itself has no interest in depicting legitimate representations of reality; it is inherently irreal, and it would be naïve to expect pornography directors to operate differently. This irreality I think is poorly understood, and thus the “replicator” argument as adopted by the IGN reporter becomes the most common sentiment for people that find pornography affronting to their morals and are also disinterested in research or empirical data. Glenn Beck, commenting on the release of Grand Theft Auto IV, said “there is no distinction between reality and a game anymore.”* He went on to say that promiscuity is at an all-time high, especially with high school students, when the number of sexual partners for young people is at a generational low. The seemingly a priori nature of a negative pornographic effect allows woefully out-of-touch rhetoric to dominate the conversation, appealing also to the emotional repulsion we may experience when considering violent porn. It encourages a simplifying effect to the debate as well. Again, were it simply true that nations with heavy pornography traffic face more frequent sexual violence (as a result of psychological conditioning, etc.), we would expect countries like Japan to be facing an epidemic – especially given the infamous content of Japanese porn (spread across online pornography, role-playing games and manga). Yet, among industrialized nations, Japan has a relatively low rape frequency. The rape ratio of a nation cannot be guessed simply from the size or content of its pornography industry.

Across the board, the verdict is simply still out, as most criminologists, sociologists and psychologists agree. There are innumerable religious and secular institutions committed to proving the evils of pornography, but contrasting them are studies that demonstrate that, alongside the arrival of internet porn, (1) sexual irresponsibility has declined, (2) teen sex has declined (with millennials having less sex than any other group), (3) divorce has declined, and – contrary to all the hysteria, contrary to all the hubbub – (4) violent crime and particularly rape has declined. Even with these statistics, and of course compelling arguments might be made against any and all research projects (one such counterargument is here), violent efforts are made to enforce legal restrictions – that is something that will probably persist indefinitely.

I first became interested in debating pornography with the explosion of “Porn Kills Love” merchandise that became popular half a decade ago. The evidence has never aligned itself with either side; if anything, to this day it points very positively toward a full acquittal. Yet, young and old alike champion the causticity of pornography toward “society,” the family, women, children, and love itself (even as marriage therapists unanimously recommend pornography for marriage problems). Religion has an intrinsic interest in prohibiting pleasurable Earthly activities, but the ostensible puritanism of these opposing opinions is not present in any religiously-identifiable way for a great number of the hooplaers. So an atheistic condemnation of pornography goes unexplained. One might suppose that, lacking the ability to get pleasure (out of disbelief) from a figure-headed faith (which sparks some of the indignation behind New Atheism), people move to destroy others’ opportunities for pleasure out of egalitarianism, and this amounts to similar levels of spiritual zeal. Traces of sexist paternalism are to be found as well, e.g. “it’s immoral to watch a woman sell her body for money,” and through these slogans Willis’ accusation of moral authoritarianism becomes evident. Thus the attitudes which have always striven to tighten the lid on freedom and individual spirituality – puritanism, paternalism, misogyny, envy, etc. – align magnificently with opposing pornography, soft-core or otherwise.

*I try to avoid discussion of GamerGate or anti-GG, but it is almost impossible when discussing videogames and lunatics. Recently, commenting on Deus Ex‘ options for gameplay, which allow the player to make decisions for themselves, Jonathan McIntosh described all games as expressing political statements, and that the option should not even be given to the player to make moral decisions about murder, etc. It’s immoral that there is a choice to kill, was his conclusion. He’s right about all games expressing political statements. But he’s a fucking idiot for his latter statement.

[In my next post I’ll conclude with an investigation into the importance of virtual reality technology and the effect it will have on society.]