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Author Topic: Why bitcoin isn't the answer  (Read 1968 times)
sprewell
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June 03, 2011, 10:51:28 AM
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Hey, been seeing bitcoin come up on my radar all over the place recently, good to see an alternative online currency getting somewhere.  I've been reading and thinking about currency since the financial crisis, particularly about what the fundamentals of a currency are and how the internet can revamp how we trade for stuff, and it strikes me that bitcoin doesn't go far enough in making use of these new possibilities.  I'm writing up my thoughts on the economics here, thought you guys might be interested.

As I understand bitcoin, it's essentially a fiat online currency with computational controls so that it's distributed and has a stable growth rate.  The latter is actually what Milton Friedman wanted the Fed to do with the dollar, just increase it by a set rate every year. Smiley However, it strikes me that currency is now an outmoded concept, with all the stuff we can do online these days.  What if we simply traded electronic options contracts for things like groceries or haircuts instead?  So when I buy a candy bar, I wouldn't pay with a dollar bill or bitcoin, I'd pay with an electronic contract good for a tenth of a haircut or a bottle of orange juice, redeemable within the next year. Cheesy

The fundamental insight here is that all currency is essentially a short-term option contract, ie a way to store value for the short-term in order to consume later, contracts which didn't exist when currency was invented millenia ago but which are commonly and easily created for some goods these days.  The good news for the commodity backing crowd is that all these options contracts are backed by some good or service, maybe they'll stop whining about gold then. Wink This is essentially online barter, taken to another level by the option aspect.

Of course, it has the same problem as barter: how do you know how much to trade of one chicken for one goose?  Here I would imagine the solution is that option indices would be created.  Some companies would figure out what the relative market values are and supply them to your smartphone to show you how much it would cost you to buy that sofa.  One could even show the "price" in the number of hours of work instead: how much time would you have to spend at your data entry job to pay for this sofa?  After all, that's the real price of something, how much time you had to spend at work to afford it.  A computer programmer who currently gets paid $50/hour would be quoted a price of 15 hours for that $750 sofa while the data entry clerk making $10/hour now would be quoted 75 hours for the same sofa, ie everyone sees a price tailored to them.

In sum, there are many aspects of trading that can be reinvented online.  I don't claim to have all the answers but I'm pointing out all the aspects of currency that can and should be rethought, now that software allows us to do so much more.  I don't think that creating yet another fiat currency in bitcoin is going to be the long-term solution.  However, I don't mean to be too critical of bitcoin, just trying to reason about the economic fundamentals and thought some of you might be interested in thinking about the possibilities too.
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jtimon
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June 03, 2011, 11:13:55 AM
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The most common definition of fiat (at least here) is "enforced by a government" instead of "non backed" as I guess is yours.
For what you're saying, I think you will be interested in ripple. With ripple you can issue IOUs denominated in anything. If you can complement with a digital signature that makes you liable (for example, an electronic identification card), you have the commodity/services contracts you want. With ripple, you connect to "friends" which you accept IOUs from. The system looks for a path between payer and payee and then exchanges IOUs between intermediaries. Take a look:

http://ripple-project.org/

The advantage of bitcoin over ripple is that your liquidity doesn't depend on your web of trust. Also, Ripple doesn't have a distributed implementation yet. I think both will be used in the near future.
I agree with you that "stable prices" can be achieved through indexes instead of messing with the money supply.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
benjamindees
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June 04, 2011, 12:07:29 AM
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One could even show the "price" in the number of hours of work instead: how much time would you have to spend at your data entry job to pay for this sofa?  After all, that's the real price of something, how much time you had to spend at work to afford it.

LOL labor theory of value.

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June 04, 2011, 01:00:51 AM
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One could even show the "price" in the number of hours of work instead: how much time would you have to spend at your data entry job to pay for this sofa?  After all, that's the real price of something, how much time you had to spend at work to afford it.

LOL labor theory of value.

Marxist theory is just as sensible as most of the Austrian theory that people on this forum seem to love.

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kiba
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June 04, 2011, 02:13:42 AM
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One could even show the "price" in the number of hours of work instead: how much time would you have to spend at your data entry job to pay for this sofa?  After all, that's the real price of something, how much time you had to spend at work to afford it.

LOL labor theory of value.

Marxist theory is just as sensible as most of the Austrian theory that people on this forum seem to love.

Be willing to defend your assertion, both your marxist theory is stupid and Austrian theory is stupid.

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June 04, 2011, 03:01:53 AM
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I am not a marxist or an austrian, I think they are both absurd.

I know that you think they are absurd. I am not interested in what you think. I am more interested in if you can justify it.

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June 04, 2011, 03:02:05 AM
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I am not a marxist or an austrian, I think they are both absurd.
So, Keynesian?
Horace Kent
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June 04, 2011, 04:27:10 AM
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options are rights.  nothing more, nothing less.

another way to think of options are...........they are, in effect insurance contracts.

how those become currency......I can't cross that bridge yet.
Jaime Frontero
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June 04, 2011, 05:22:50 AM
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I am not a marxist or an austrian, I think they are both absurd.

I know that you think they are absurd. I am not interested in what you think. I am more interested in if you can justify it.

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Braden
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June 04, 2011, 06:19:15 AM
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I am not a marxist or an austrian, I think they are both absurd.

I know that you think they are absurd. I am not interested in what you think. I am more interested in if you can justify it.

Marxist theory of value is inherently flawed in that it ignores capital as a factor and assumes that value produced in excess of labor is exploitation. This analysis would also apply to, say, a automated printing press. Additionally, the long term conclusions of Marxist theory are not empirically supported.

While I am sympathetic to some of Austrian theory, I find their analysis of the boom/bust cycle to be problematic. Tulip bulbs did not inflate due to low interest rates or government intervention. I find the irrational exuberance explanation a for more compelling theory, and one that is better supported by psychological research into decision making.

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hugolp
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June 04, 2011, 06:24:58 AM
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I am not a marxist or an austrian, I think they are both absurd.

I know that you think they are absurd. I am not interested in what you think. I am more interested in if you can justify it.

Marxist theory of value is inherently flawed in that it ignores capital as a factor and assumes that value produced in excess of labor is exploitation. This analysis would also apply to, say, a automated printing press. Additionally, the long term conclusions of Marxist theory are not empirically supported.

While I am sympathetic to some of Austrian theory, I find their analysis of the boom/bust cycle to be problematic. Tulip bulbs did not inflate due to low interest rates or government intervention. I find the irrational exuberance explanation a for more compelling theory, and one that is better supported by psychological research into decision making.

Actually, Austrian theory explains perfectly the Tulip bubble. During the time the Tulip bubble happened there was a big influx of gold and silver coming from America to Europe. Therefore there was a big expansion of the money supply, which austrians predict will cause bubbles, and it is what happened.

There were bubbles in all Europe, but there was a large influx of gold towards Holland (thus creating the most famous Tulip bubble) becaus of the fame of the Bank of Amsterdam. More info here: http://mises.org/daily/2564 (its long, you can download as pdf, and you will find the data about the monetary expansion)
benjamindees
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June 04, 2011, 09:46:29 AM
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Additionally, the long term conclusions of Marxist theory are not empirically supported.

The long term prediction of Marx was that capitalism would inevitably go through periodic crises as labor became obsolete, and that socialist institutions would be erected as a fig-leaf to allow capitalism to continue even as society as a whole became more and more collectivist.  In my view, long term predictions were the only thing Marx got right.

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