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mutterc comments on General Bitcoin discussion thread (June 2011) - Less Wrong Discussion
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My understanding:
Or in two words: techno-libertarian porn.
EDIT: It occurs to me the fixed upper quantity is necessary given de-centralized production.
It also occurs to me to wonder if there are any reasons to advocate Bitcoin other than those two - anyone want to help me update?
I share with your general impression, but I think your phrasing casts bitcoin advocates as idiots which is a poor discussion tactic.
Well, this is just the difference in worldview between two camps, based on their differences in experiences and research.
See, the anti-inflation types among us have been trying to live responsible lives, saving for the future. We thought that the economy rewards those that defer their consumption until later and who invest for the future. But at every turn, those in charge of managing the money supply have stymied us. They've jacked up the money supply, making our purchases more expensive, all while denying the severity of it. (In the case of technological improvements that imply a lower effective price, they've made them more expensive than they would otherwise be.)
This debasement of the currency has amounted to a subtly-hidden transfer of wealth to privileged classes. The government has granted financial intermediaries privileged positions and, through the central bank, funded new spending with printed money that will never be paid back, murdering our ability to earn a fair inflation-beating return on our savings, when the market is supposed to reward those who defer consumption. And then it takes even more to bail out failing business, making it impossible to decouple ourselves from the rot in the economy, all while telling us to lock up our money in IRAs invested in government approved dinosaur businesses .
Folks that have actually had to live through this economic insanity "get it". Those who go ever deeper into debt to double-down on economy's increasingly lost production structures don't see the problem -- they want their debts inflated away. They want that new money to slosh around and get the dumb rubes back spending spending, spending -- on anything, it doesn't matter how short-sighted, how wasteful, how ill-considered: an arbitrary economic metric needs to act like it did in the glory days of 2005 (when the financial sector was busy defrauding pensions), and, well, that's that. That's the key to economic prosperity.
Well, the responsible class is fed up with this. That's what drives these people to alternative currencies that can potentially protect them from Fed asininity, reasoning that an appreciating currency doesn't quite sound so bad. They like the idea of a currency with a predictable supply so a tiny committee can't arbitrarily decide to give a big f***-you to the savings of the only folks actually driving the real production these days. And, when a bank wants to make irresponsible loans with the currency, they want to be able to decouple themselves from the shenanigans by holding onto real, uncopiable units that will keep their value when the house of cards comes tumbling down.
But unless you've tried to actually save for the future, none of this makes a lick of sense to you, and I can understand that. But maybe now you can see why an un-debasable currency might appeal to some folks that we should care about quite a bit. [/rant]
I know that this is labeled as a [rant] but it really is a terrible argument. Inflation rates do not affect investment returns in the long run. High inflation only hurts those who directly hold currency. High surprise rises in inflation only affect those who have fixed-income investments, or those who are exposed to nominal fluctuations due to e.g. long-term contracts.
The secular fall in real returns to investment has nothing to do with monetary inflation: it's due to emerging countries and oil-financed sovereign funds flooding Western nations with large amounts of capital, and to sharply falling transaction costs for access to the stock market, which encourage more domestic investment as well.
In theory, yes, interest rates are bid up to be high enough to compensate for inflation and then some. In practice, that is not happening right now, because the market for interest-rate-determining instruments (like Treasury bonds) is saturated by people who by and large don't care about making up for inflation in the return: the Federal Reserve, exchange-rate-manipulating foreign central banks (like China), and insurance companies.
When even stock holdings won't cover inflation over the long term (like stock indexes have failed at for 10+ years), there is a serious problem.
You're missing my point. What you're saying translates to: "In theory, real interest rates are positive, but in reality they've been driven to negative levels because savings are so high." But nothing in theory stops real rates from being negative at any point in time.
By the way, your list of actors seems misguided: (1) The Fed buys Treasury bills when they issue cash, which is basically exchanging one government liability for another: it doesn't change aggregate saving. (2) Insurance companies invest money on behalf of people who buy long-term instruments such as life policies and annuities. (3) China does manipulate exchange rates, but the only reason they are able to buy so many Treasuries is Chinese workers saving large portions of their income and depositing them in the local bank. AFAICT, there is no case for giving any less consideration to Chinese workers than to US-based savers.
Let's hear your economic system design where anyone can gain real wealth by simply putting their cash under mattresses (as would be true if deflation were the norm). Who needs to invest in the actual productive economy?
Your argument seems to imply that the existence of even one deflationary good is sufficient to destroy an entire economy. Surely if this were the case then the law of large numbers would have killed us by now.
My understanding is that one good wouldn't do it, but persistent, overall deflation would in fact devastate the economy.
Sure, right now you can stick money under a mattress for 6 months and buy more Core 2 laptops than you could today. But that doesn't seem the same as "getting richer".
Where's the line? Good question. Obviously if you could buy more of anything that would be getting richer without investing the money. Or if you could buy more (houses or food or cars or Internet access or electricity or sex or drugs or rock n' roll).
There was persistent overall deflation in various periods in the 19th century, and it didn't devastate the economy.
If you consider only cash and laptops, then it looks reasonable to call cash deflationary, but if you consider the economy as a whole, then it's more accurate to say that laptops are inflationary.
What makes the deflation of bitcoins an "overall" deflation, as opposed to the deflation of one good?
The implied context of all this is: what if Bitcoin (or something similar) became a/the dominant currency, that paychecks, debts, etc. are denominated in?
If it doesn't then it doesn't really matter, societally, if it inflates, deflates, mutates, or defenestrates (other than to the people who invest in it...) It'd just be another good, as you say.
You seem, then, to be arguing that the behavior of our currency has an importantly different kind of effect on the overall economy than the behavior of any other asset.
...on reflection, I think that's actually right. Under hyperinflation, people tend to run around with wheelbarrows of banknotes rather than reverting to barter. I'll have to think about it some more.
Nevertheless, I would expect the effects of currency deflation to be limited or mitigated by the fact that you eventually have to buy food.
Hyperinflation only happens precisely because people have less and less interest in wheelbarrows full of bank notes. The reason it feeds on itself is that people desperately want to turn their notes into real goods or exchange for more stable currencies. That lowers the value of the notes even further since there are more notes chasing the same amount of desirable goods.
I'm not sure a hyper-deflation can really happen. What would that look like, merchants lining up outside my house trying to sell me another Blueray player for increasingly small fractions of a coin?
If no one wants to spend this money, can it really retain value for very long? I'm genuinely perplexed.
Good point. I have a bad habit of spending time in corners of the Internet where libertarians, gold-bugs and various mutations thereof like to come and argue (i.e. any economics-related blog); so anything that looks like hard-money or libertarian advocacy provokes an instant "aw geez, not this shit again!" reaction.
It does occur to me that any system of money with de-centralized production probably does have to have an upper quantity limit, to keep random assholes from manipulating its value.
As popular as libertarianism and goldbuggism seem to be, it wouldn't surprise me if much Bitcoin advocacy did derive from those beliefs. And it seems those beliefs are at least as misguided as theism (and we have no trouble being dismissive of them). Is there a nice way to discuss that?
Sure, just discuss the particular problems with the (best versions of) propositions put forth by such people, and how their conclusions don't follow, and what specific pieces of evidence weigh heavily against them. (Note the lack of smearing them as racists in this method.)
OTOH, if all you have is, "these people are weird and I don't like them but I don't specifically know what error they're making, they just seem like aristocratic Southern racists", you're best off keeping that to yourself.
OK. Libertarianism I can leave to others (I don't think I have anything new to say about it). As for hard-money advocacy, usually one sees the following errors:
As far as I can tell, the only of those I've seen from you in particular is the last one, and that's another subthread.
There is a new one, from you, in this discussion though: the idea that "too much" economic activity is happening now, and it would be better to defer some of that economic activity until later. High unemployment refutes this. [If you'll claim current unemployment is structural in nature, then what is the industry that lacks labor, and is thusly currently experiencing increasing real wages?]
I find it funny how fans of mainstream economics mock goldbugs about this, while at the same time basing a large part of their own theories on a far more extreme Platonic concept of "real" values calculated using price indexes.
I do not have the impression that mainstream economists subscribe to a Platonic concept of "real" values. (Or maybe I'm just confused about what you mean.) Can you cite an example of this (i.e., a paper or article that describes or assumes such a concept)?
I have in mind the regular use of "real" figures in economics (i.e. those that are "inflation-adjusted," as well as those based on "purchasing power parity" etc.). These concepts are in principle dissolvable -- when citing some "real" figures, economists could address the questions of what exact index was used to adjust the value, what would be the implications of choosing a different index, how much the figures vary under different more or less reasonable definitions of indexes, what political and bureaucratic incentives have influenced the design of the official government indexes, etc., etc. Trouble is, in practice they almost never do, and except for some narrow and specialized work that studies indexes as such, the de facto standard of discourse in economics is to treat the "real" values as having a Platonic reality. (Even people who specifically study price indexes typically speak about "overestimating" or "underestimating" their value, as if there existed some Platonic "true" value out there.)
As an example of nonsense along these lines, you can take almost any paper that discusses how much some "real" variables have changed over a period of several decades (sometimes they'll even talk about centuries). Of course, if you read that something cost a dollar in 1950, you'll want to know how that compares with the 1950 prices of, say, a loaf of bread, an hour of unskilled labor, etc., to get the feel for how much a dollar was worth back then. However, asking what the "real" value of a 1950 dollar is in 2011 dollars, as a unique and well-defined number, is simply meaningless, considering that you can't trade dollars across time, and the world has changed so much, both technologically and socially, that what counts as "living" in the typical "cost of living" in each era is incommensurable. (The same of course goes for comparing very different places in the same era, and even for similar places, what you count as the "typical" cost of living is largely arbitrary, especially considering the increasing prominence of status goods and conspicuous consumption in the modern economy.)
Yet such numbers are regularly cited with three, four, or even more significant digits, without any consideration of how their value depends on arbitrary conventions and how this dependence influences the argument at hand. (And even if such problems are acknowledged, they are usually presented as imprecise knowledge of the Platonic "true" value, not as the fundamental arbitrariness of the whole concept.)
Ok, I was confused by "Platonic" which I thought you were using to refer to intrinsic as opposed to subjective value. Thanks for the clarification.
In the sense you intend, I think you're right that mainstream economists do subscribe to a Platonic concept of "real" value. They believe that real-world price indexes are based on a theory of price indexes, which is based on a theory of social welfare, which in turn is based on sound philosophy. But I think they are also aware that there are lots of problems with both theory and practice (perhaps less aware of the philosophical problems) even if they tend to not pay much attention to them in their daily work. Standard textbooks do mention the problems, and intuitively it's pretty obvious that price indexes must be at best very flawed approximations to reality.
Putting aside what mainstream economists believe, when you say "meaningless" or "fundamental arbitrariness", do you mean for example that there is no way, even in principle, to compare the marginal utility of a dollar in 1950 with the marginal utility of a dollar in 2010? Is it due to the standard interpersonal comparison of utility problem, or something else?
To put it another way, do you think the mainstream economics community should be more aware of problems with the theory and practice of price indexes and perhaps allocate more resources to solving them, or do you think they are just not solvable, and an entirely new approach is needed?
Subjective value is indeed among the core assumptions of neoclassical economics. The problem is that a whole lot of stuff that economists would like to be able to do (due to both theoretical and ideological interests) is automatically ruled out by this assumption. Reification of "real" values is one way how they try to square this circle, since it enables them to introduce intrinsic value in all but name into their theories.
Yes, you can see this as a corollary of the general problem of interpersonal utility comparison. (Although even if interpersonally comparable utilities are granted and known, you need additional strong assumptions to get rid of all the degrees of freedom that make the choice of index arbitrary.) But these are all different ways of looking at the same problem, namely the problem of intrinsic vs. subjective value.
This is not to say that every attempt to compare the value of money in different places and times for some particular purpose is meaningless, but whether a given attempt is meaningful depends on the context and the sort of comparison used. To guarantee soundness, such comparisons should be justified on a case by case basis by demonstrating that the conclusion indeed follows from the particulars of the way comparison is done. What is definitely unsound is defining a general-purpose “real” value of money and then using it as de facto intrinsic value, without any reflection on how exactly its definition connects to the concrete problem at hand.
Your question seems to assume the existence of a real scientific community in economics, of the sort that exists in natural sciences. However, the problem is that the economics profession has always been deeply intertwined with politics, government bureaucracy, and broader ideological controversies, and as with other social sciences, many of its basic theories and concepts were invented to support an ideological agenda, not as part of a true scientific endeavor. Moreover, many questions in economics have real immediate implications in terms of power, wealth, and status -- to take a pertinent example, entitlement payments by the government are often linked to price indexes, so the question of how they should be defined is not just theoretical, but of immediate financial interest to many parties. Clearly, it would be naive to expect that such questions will be treated with a pristine scientific approach.
In this situation, it’s unrealistic to try to identify and fix the problems and biases in economics (and other social sciences) on a case by case basis, since the real problems are much more general and fundamental. Of course, the existing body of knowledge in economics is far from being entirely worthless, but separating the wheat of true insight from the chaff of ideological delusion and dishonesty, let alone establishing a real epistemologically sound science in place of what exists now, would be a very radical project.
Can you expand? Here's the difference as I see it:
Which is more or less useful, and why?
Depending on the context, either concept can be anything from useful to deeply misleading. However, in contrast to the (mis-)use of price indexes in mainstream economics, the goldbug obsessions can always be countered by simply pointing out that gold is not an end-all. Therefore, while there will always be goldbugs immune to rational argument, their ideas are unlikely to become a basis for elaborate, sophisticated-looking, and academically accredited pseudoscience.
In contrast, the concept of "real" values in mainstream economics typically degenerates into an even more far-flung Platonic fantasy that there is some "real value" of money out there to be measured, discussed, and incorporated into theories like a real physical quantity. This fantasy is obscured by a vast cloud of complicated and abstruse (and seemingly objective and scientific) theory, to the point where it's usually impossible to disentangle reality from fantasy and spin without a very considerable effort -- in which economists are usually unwilling to cooperate, if not outright hostile.
None of the attributions to me sound like anything I've said, and your counterarguments are just parroting the mainstream view that I'm well aware of and criticized very specifically.
I've not been very coherent, and I think my once-debilitating fear of the Invisible Hand has not gone away enough. So I'm not making a lot of sense, even to myself.
So, umm, never mind. Sorry for polluting the thread.
Or with different connotations: it's not under the control of any particular person or group, which excites people who think power corrupts.
I'm not sure that the fixed quantity is necessary. The generation rate hasn't started leveling off yet, and the bitcoin economy seems to be okay. I've thought before that it might have been better to schedule long-term linear growth, just keeping the block bounty at fifty forever.