2013-04-12 krugman.blogs.nytimes.com - Adam Smith Hates Bitcoin

[herzmeister]

http://krugman.blogs.nytimes.com/2013/04/12/adam-smith-hates-bitcoin/

Adam Smith Hates Bitcoin

There have been many good pieces written on the dubious economics of Bitcoin; I especially liked this one by Neil Irwin. One thing I haven’t seen emphasized, however, is the extent to which the whole concept of having to “mine” Bitcoins by expending real resources amounts to a drastic retrogression — a retrogression that Adam Smith would have scorned.

Smith actually wrote eloquently about the fundamental foolishness of relying on gold and silver currency, which — as he pointed out — serve only a symbolic function, yet absorbed real resources in their production, and why it would be smart to replace them with paper currency:


The gold and silver money which circulates in any country, and by means of which, the produce of its land and labour is annually circulated and distributed to the proper consumers, is, in the same manner as the ready money of the dealer, all dead stock. It is a very valuable part of the capital of the country, which produces nothing to the country. The judicious operations of banking, by substituting paper in the room of a great part of this gold and silver, enable the country to convert a great part of this dead stock into active and productive stock; into stock which produces something to the country. The gold and silver money which circulates in any country may very properly be compared to a highway, which, while it circulates and carries to market all the grass and corn of the country, produces itself not a single pile of either. The judicious operations of banking, by providing, if I may be allowed so violent a metaphor, a sort of waggon-way through the air, enable the country to convert, as it were, a great part of its highways into good pastures, and corn fields, and thereby to increase, very considerably, the annual produce of its land and labour.


And now here we are in a world of high information technology — and people think it’s smart, nay cutting-edge, to create a sort of virtual currency whose creation requires wasting real resources in a way Adam Smith considered foolish and outmoded in 1776.

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[herzmeister]

The whole argument is ridiculous even by Krugman's low standards.

It may be true that gold and silver are less than optimal currencies for an economy, as their exchange value would rise above their use value, making them more expensive for those who want to actually use them in electronics etc (although that's obviously also the case when they aren't official currencies like today; so what could Soviet Krugman do about it anyway).

But the output of Bitcoin mining isn't such a resource; in fact it's one of the most optimal, side-effect-free stores of value imaginable.

[grondilu]

I wish someone could make a study on how much energy and/or money is spent with the bitcoin network as opposed to the current monetary system.

Among the factors that should be included are the wages of the banking staff, banks real estate and basically all these resources that are used to have humans do a work that machines do in the bitcoin network.  I'm not sure bitcoin will lose the comparison.

[marcus_of_augustus]

Amazing.

Wonder if krugman ever had the courage to analyze what Adam Smith would have made of a scheme to eternally expand govt. debt-based money as a means of financing a wholly dysfunctional centrally planned economic system?

[bb113]

Wow, these talking points are terrible. Also, once again no data from the economists. If he was a type of real scientist he would use his position of influence to gather data on how much energy is expended globally on fraud prevention and compare that to the energy used by the bitcoin system (data that the bitcoin nerds have chosen to collect and actually study in an effort at self-investigation).

[proudhon]

http://krugman.blogs.nytimes.com/2013/04/12/adam-smith-hates-bitcoin/

Adam Smith Hates Bitcoin

There have been many good pieces written on the dubious economics of Bitcoin; I especially liked this one by Neil Irwin. One thing I haven’t seen emphasized, however, is the extent to which the whole concept of having to “mine” Bitcoins by expending real resources amounts to a drastic retrogression — a retrogression that Adam Smith would have scorned.

Smith actually wrote eloquently about the fundamental foolishness of relying on gold and silver currency, which — as he pointed out — serve only a symbolic function, yet absorbed real resources in their production, and why it would be smart to replace them with paper currency:


The gold and silver money which circulates in any country, and by means of which, the produce of its land and labour is annually circulated and distributed to the proper consumers, is, in the same manner as the ready money of the dealer, all dead stock. It is a very valuable part of the capital of the country, which produces nothing to the country. The judicious operations of banking, by substituting paper in the room of a great part of this gold and silver, enable the country to convert a great part of this dead stock into active and productive stock; into stock which produces something to the country. The gold and silver money which circulates in any country may very properly be compared to a highway, which, while it circulates and carries to market all the grass and corn of the country, produces itself not a single pile of either. The judicious operations of banking, by providing, if I may be allowed so violent a metaphor, a sort of waggon-way through the air, enable the country to convert, as it were, a great part of its highways into good pastures, and corn fields, and thereby to increase, very considerably, the annual produce of its land and labour.


And now here we are in a world of high information technology — and people think it’s smart, nay cutting-edge, to create a sort of virtual currency whose creation requires wasting real resources in a way Adam Smith considered foolish and outmoded in 1776.

He's right, you know, because the only resource consumed by government currency is paper.

[Severian]

I wish someone could make a study on how much energy and/or money is spent with the bitcoin network as opposed to the current monetary system.

I saw an estimate last year somewhere on this board that the Bitcoin network took as much energy in a day to operate as the Bank of America tower in NYC does. If anyone recalls the post, link it please.

[bb113]

I wish someone could make a study on how much energy and/or money is spent with the bitcoin network as opposed to the current monetary system.

I saw an estimate last year somewhere on this board that the Bitcoin network took as much energy in a day to operate as the Bank of America tower in NYC does. If anyone recalls the post, link it please.

This is what im talking about. Proponents of bitcoin actually go out and investigate their ideas. The detractors seem to be mostly those who just think/read something then say it without any critical thought or effort at providing evidence. It's honestly sickening that some of these people are considered influential.

[marcus_of_augustus]

Proudhorn says:

He's right, you know, because the only resource consumed by government currency is paper.

This is sadly misinformed. The resources consumed by poorly managed govt. paper currency (which they all inevitably are since humans are fallible) also encompasses all the waste associated with the gross mis-allocation of capital and resources that come about from centrally-planned financing ... it is not just mere few bits of coloured paper expended but the complete screw up of the economic system that needs to be accounted for ... count that up and get back to us.

Edit: Patiently waiting for krugman's follow up post titled "Adam Smith Hates Federal Reserve Banking"

[Severian]

Proponents of bitcoin actually go out and investigate their ideas.

Makes sense, though. Rational money attracts rational supporters and irrational detractors.

[Wekkel]

Bitcoin proves them wrong again and again and again and .......

[Elwar]

Bitcoin electricity cost:

$149,946.54 / day *

http://blockchain.info/stats

* Electricity consumption is estimated based on power consumption of 650 Watts per gigahash and electricity price of 15 cent per kilowatt hour. In reality some miners will be more or less efficient.

[thefiniteidea]

"Adam Smith Hates Paul Krugman, Has Affair With Electricity"

It's true because I said so as the title of something and wrote a few words about it.

And because I said so because I'm Paul Krugman and fuck you.

Oh and stop using electricity. We have more important wars to fund, people to starve, television to watch, and societies to control using paper.

Adam Smith said so... Though, he he did leave me for the ground.  

[Stephen Gornick]

And because I said so because I'm Paul Krugman and fuck you.

I see this pendulum swing ... bitcoin rallies and gains momentum then a concerted effort at talking it down from the academics and others occurs and bitcoin idles for a while, but then it gains traction again and that becomes undeniable where it starts to rally again and the cycle repeats.  But each time bitcoin ends with higher highs and higher lows.     

The exposure these people bring to bitcoin is invaluable.

I wish Krugman would pen a post on bitcoin each and every day!

[em3rgentOrdr]

Here is an article that argues that it is really wireless & 4G networks that energy-concious people should be concerned about, not bitcoin or datacenters: http://www.washingtonpost.com/blogs/wonkblog/wp/2013/04/12/what-bitcoin-teaches-us-about-the-internets-energy-use/ (and the corresponding post I just made on the bitcoin forums: https://bitcointalk.org/index.php?topic=175429

[spunit262]

Reading this has convinced me that Adam Smith would have absolutely love Bitcoin. As the only resources it consumes are a subset of those consumed by paper money.

[da2ce7]

Proudhorn says:

He's right, you know, because the only resource consumed by government currency is paper.

This is sadly misinformed. The resources consumed by poorly managed govt. paper currency (which they all inevitably are since humans are fallible) also encompasses all the waste associated with the gross mis-allocation of capital and resources that come about from centrally-planned financing ... it is not just mere few bits of coloured paper expended but the complete screw up of the economic system that needs to be accounted for ... count that up and get back to us.

Edit: Patiently waiting for krugman's follow up post titled "Adam Smith Hates Federal Reserve Banking"

This is the key point.  It is not the electricity cost.  (or gas,  or whatever) that is significant. It is the miss-allocated resources,  from the manipulation of the monetary supply. This is the huge cost to society.

[cly]

They hate?

Means BTC really got some relevance.

YES - EPIC WIN!

[n8rwJeTt8TrrLKPa55eU]

The exposure these people bring to bitcoin is invaluable.

I wish Krugman would pen a post on bitcoin each and every day!

100% true.

The first step to acquiring and using Bitcoins, is discovering that Bitcoins exist.

He is helping to lay down the foundations and prerequisites for eventual worldwide adoption.

[grondilu]

I see this pendulum swing ... bitcoin rallies and gains momentum then a concerted effort at talking it down from the academics and others occurs and bitcoin idles for a while, but then it gains traction again and that becomes undeniable where it starts to rally again and the cycle repeats.  But each time bitcoin ends with higher highs and higher lows.     

The exposure these people bring to bitcoin is invaluable.

Nice analogy.  The beauty of this is that we can't even be blamed for that.