You know what I want? I want Paul Krugman to video call me right now. I'll show him how to download a cryptocurrency wallet. Then he'll hold up his phone. I'll scan the QR code of his public address. And I'll send him the tokens of his choice.
He would see and experience how this works. He might hate it, as he still does, but at least he would immerse himself in and experience the reality of a modernized money and payments system instead of writing rubbish about it.
shift
There has been a lot of buzz in the Bitcoin and other Twitter communities about Krugman’s recent criticism of Bitcoin. What has gone unnoticed is that his position is “Bitcoin is evilIn a Dec. 28, 2013 column, he wrote: “He once thought all this was absurd. He now thinks it is unwise and unworkable as a monetary system.”
That's a big difference. It's progress. His current position on the issue is exactly what you'd expect from a Keynesian like him, which is that he is adamantly opposed to any money, be it gold or Bitcoin, that is not created and controlled by the state.
The first article of 2013 was written when the stock price hit $1,000 and started to fall. As I type this, I am painfully aware that this was an unusual price at the time. At the start of 2013, the stock price was hovering around $14, just shy of the levels that barely anyone paid attention to in 2011. It would have been easy to dismiss it as utter nonsense, and Krugman did just that.
This is not real
I understand. I did the same thing in 2010. It took me two years to understand that cryptocurrencies were not only real, but also a great innovation. By the time I did, there weren't many mainstream articles on the topic yet. Most of the available resources were not written for economists.
So it was a big deal when Krugman finally spoke out.
“Can this really work?” he asked in 2013. “I'm still not at all convinced. To be successful, money needs to be both a medium of exchange and a reasonably stable store of value… And it remains completely unclear why Bitcoin should be a stable store of value.”
Now, this one needs a little tweaking. Ludwig von Mises said, Decisive The 1912 paper on money and credit describes money's “store of value” function as a secondary feature of its primary utility: There are many stores of value, money being one of them, but this is an example of its use, not a test of its basic function.
“When the habit of using a certain economic good as a means of exchange becomes widespread, people begin to hoard that good in preference to other goods. In fact, hoarding as a form of investment does not play a significant role at the current stage of economic development, being replaced instead by the purchase of interest-bearing assets.”
So the “store of value” use case is a stage in the evolution of money, not a long-term, permanent practice. Keep in mind that Mises wrote this over 100 years ago; people had already found ways to store wealth other than stuffing money in their mattresses. And today, the idea that Bitcoin should be judged on whether it is a store of value, much less a stable one, is absurd.
The irony deepens when we look at the data on Bitcoin velocity: since its price crash in December 2017, Bitcoin velocity has slowed dramatically.
Blockchain Info
Moreover, Krugman completely ignores a key financial innovation of his time (and still today): cryptocurrency. The peer-to-peer network that enables final settlement is built into the monetary unit, so issues of storage, geography, and trust disappear entirely. This is an entirely different way of conceptualizing money, where money and the payment system are one and the same.
The value of the token itself comes from its payment services: if there was a way to separate Bitcoin from the distributed ledger, it would be destroyed and rendered useless.
If Krugman didn't understand this and still doesn't, how do we get from there to the headline claim that “Bitcoin is evil”? Perhaps the headline writer made a good point, but the claim has been going on for five years. From this article we can conclude that Krugman thought the innovation was completely unredeemable and a malicious fake.
Then and now
Now, his views on technology itself are more nuanced.
Instead of nearly frictionless transactions, there is a high cost of doing business because to send Bitcoin or other cryptocurrencies, you must provide a complete history of your past transactions. Instead of money created with the click of a mouse, you have money that is created through resource-intensive calculations and must be mined. The high cost of creating new Bitcoin or sending existing Bitcoin is essential to any project that creates trust in a decentralized system.
He is completely wrong in his belief that to use Bitcoin you need to personally host a full node that records all transactions, but I won't get into that. It's not. For all its “money created with the click of a mouse” glory, Bitcoin is a scarce commodity, and money necessarily must be scarce to gain and maintain its value (if a commodity is not scarce, it necessarily becomes priceless without laws).
Krugman’s latest analysis is an exercise in comparative institutions: he recognizes that Bitcoin is real, but now he wants to talk about it as a monetary system. He prefers fiat currency because printing money is much less costly than mining cryptocurrency.
To be sure, “governments have occasionally abused their privilege to issue fiat currency,” he writes, “but for the most part, governments and central banks have exercised restraint.”
This is a ridiculous way of ignoring the horrors of inflation, which have caused revolutions, political upheavals, cultural disasters, and centuries of tyranny. The human suffering caused by central bank control and paper money is immense. And even if the obvious disasters are not caused by the nationalization of money, there are other effects: unlimited government debt, uncontrollable spending, and massive increases in government power, all made possible by “money created at the click of a mouse.”
Digital Gold
Krugman's subtle shift is from “it doesn't work” to “it's not as good as central banks or fiat money.”
I see this as progress. His negative view of cryptocurrencies is what you would expect from a theorist trained in Keynesianism. Keynes hated the gold standard for its resource costs, its limitations on political dreams, and the way it stifles reality. He attacks Bitcoin for the same reasons that Keynes attacked gold, even though Bitcoin is far from being a contender as a currency.
There is often a debate between proponents of gold and cryptocurrencies. Discussion Take Peter Schiff for example. But as Krugman's column shows, from the perspective of economic theory, the real division will always be between those who support sound currency and those who want total government control of currency, i.e., an unsound currency.
For now, this technology need not be judged based on some imagined future where it completely replaces national currencies – I don't see that happening in our lifetimes. The question to ask now is, does this technology serve a useful purpose as far as the market is concerned?
Meanwhile, my offer stands: if Paul Krugman wants to experience what a modernized P2P exchange of sound currency would be like, my offer stands: I would be happy to cooperate.
