Labor costs and prices in an economy using bitcoin exclusively

[ffe]

I gather from the tone of most posts here that people love the fact that only a fixed number of bitcoins will ever be produced. This is justified when you consider bitcoins as a Store of Value. No one wants their wealth stored in bitcoins to erode. Bitcoins as a Medium of Exchange are also unsurpassed. They can be transferred easily and anonymously.

There is a problem when bitcoin is considered a Unit of Account. Merchants will be constantly lowering the price of merchandise as the economy grows and the demand for money (bitcoins) grows with it. I suppose they can do this. They certainly got used to doing it in the other direction as paper money lost value.

Here’s the subtlety. A merchant changes his prices once in a while. For that reason he looks beyond the current point in time to what he expects his price should be at the next cycle. In other words, he builds in some extra price lowering to account for the fact he won’t be changing his prices for a while. When all merchants do this it builds momentum into price lowering that is very hard to change. (By the way this works with inflation too. It causes an accelerating “core inflation” and is very hard to reverse.) This can be very distorting to an economy because it enriches holder of “money” at the expense of holders of assets (like a home). In can be just as unjust as an inflationary money.

When we consider wages another problem intrudes. Normally an employer would want to lower wages periodically to reflect the fact that demand for “money” is driving up the value of bitcoins. Wages, however, are “sticky”. No one wants to see their salary lowered and will resist this. Real labor costs rise as a consequence and employers end up hiring fewer people. This has a negative effect on the economy as the amount of goods and services produced goes below potential. Again holders of cash are happy but unemployment is causing misery.

These are real problems that have to be solved before an electronic money like bitcoin can take the place of a national fiat currency. No one will want to price things in bitcoin and bitcoin will never be more than a convient replacement for a Store of Value like gold.

[FreeMoney]

Buyers want lower prices, sellers want higher prices. This is good and natural. It applies to buyers and sellers of labor just the same.

I know there are some psychological forces in play concerning wages, but laborers who accept a slowly falling wage instead of striking or quiting will do much better and others will learn and follow their lead.
We've been paying a very dear price in real terms for a little bit of psychological pleasure from watching the digits increase.

Imagine a world where apple prices fall every year and people know and expect this. If you tell them that you have a system in which prices will go up in the store over time they might tell you that just won't work, people simply won't buy apples anymore because prices are sticky downward in this world. Yeah, fine, it's a fact about the current world, it isn't a fact about how worlds have to be in order to work. People can get used to stuff pretty easily if it makes them better off in ways that actually matter.

 

[kiba]

I know there are some psychological forces in play concerning wages, but laborers who accept a slowly falling wage instead of striking or quiting will do much better and others will learn and follow their lead.
 

Perhaps the labor force will be largely freelancer so the physiological forces goes away.

[Gavin Andresen]

I think there is a strong possibility bitcoins will end up being used for something none of us is thinking about.  Maybe big multinational corporations will use them to pay their international supply chains in industries that are used to constant deflation.

[Meni Rosenfeld]

I know there are some psychological forces in play concerning wages, but laborers who accept a slowly falling wage instead of striking or quiting will do much better and others will learn and follow their lead.

Which will solve another problem. According to my understanding, currently more people are fired than should be, because they are no longer worth their current salary and decreasing salary is taboo. If people get used to decreasing salaries, this phenomenon will be eliminated and the labor market will become much more efficient.

[ffe]

By the way, if teaching workers to accept what they're given and no complaining allowed is your predisposition then fine. Deflating prices and wages is the way to go.

However, if you are in favor of limiting the supply of bitcoin because you want to protect your savings then there is an easy way to have your cake and eat it too. It goes like this:

Modern economies tend to grow at 3% in the long run. The base supply of bitcoin should grow at 3% to keep prices and wages stable, but how to do this and keep savings protected? Well the answer is a multiplier associated with blocks that multiplies the cash value of each transaction by effectively 3% by the end of the year (I could calculate the number of blocks per year and tell you the multiplier per block). This is magic that bitcoin can do which is impossible with a paper currency.

So, if someone transferred 100 bitcoins to you and you didn't spend it for a year, in 12 months you would have 103 bitcoins that you can spend from that transaction. There you go; Savings protected and prices stable.

[kiba]

All these presumptions are based on an inflationary economy and a rather Keynesian perspective. Understandable, since this type of economic thought has dominated for the last century.  The desire for increasing wages is itself based on they type of inflationary economy that everyone has become used to. The preference to this kind of thinking makes a basic assumption: That greater economic expansion is desirable, that more is better. However, the undeniable legacy of this 'Red Queen's race' is wasteful expansion, systematic economic disparity, and a disposable culture.

Price instability, in this scenario, is inherent... It's called the 'Business Cycle', and far from being an unfortunate reality that simply must be accepted it is part-and-parcel of the way transfers of wealth are caused to occur on a mass scale. It serves to concentrate power into the hands of people that 'know better'. You know... The ones that created privileged markets that allow them to move assets in ways that those in less privileged can not (Tiered money).

Of course, the lie to the wisdom of all this comes not from economics, but from thermodynamics. When you have thousands of hectares of trees to fell, a source of cheap, concentrated, energy practically gushing from the ground and seemingly endless supplies of fresh water... Then such explosive, unchecked economic growth seems like a natural choice. But... This is no longer the case. It now costs more, in terms of energy, to extract nearly any resource you can name, than at any point in human history. Yeah, it's like that.

The shift to a deflationary economy can not easily be translated in terms of the pricing pressures that drive an inflationary economy. In an inflationary economy you learn to manufacture widgets cheaply, and call this efficiency... Even if said widget is designed for disposability or obsolescence. But in a deflationary economy it becomes desirable for widgets to be manufactured to retain value over their life-cycle, and therefore to have a long life-cycle. Remember, you want to get good value for your money, because your money will be worth more if you just hang onto it. In this case price becomes more than a number, but an exchange of value for value that we have largely lost sight of.

This extends also to the commodification of labor. How sad is it, to work for a commodity (money), which you know will lose its value if you don't spend it immediately, or place it into an investment vehicle of some sort that you probably don't even understand... But in an economy that is focused more on value than price why would anyone work for money when they could work for something of greater value to them? This promises a return to skilled trades and the reversal of a century of de-humanizing Taylorism. It will be the end of the world as we know it...

Too much ideas.

[Meni Rosenfeld]

By the way, if teaching workers to accept what they're given and no complaining allowed is your predisposition then fine.

It's not about "no complaining allowed". If an employee gets a wage which doesn't reflect his contribution and\or what he can earn elsewhere, he should complain and eventually switch jobs. It's about looking at the salary in real terms and dropping the "O noes the number which represents my salary is now lower" sentiment.

[spenvo]

FFE: I have been giving these points a great deal of thought over the past few weeks:

First, I share some of your fears concerning the symptoms of deflation in a growing economy.  Deflationary spirals are, as you said, very hard to reverse when some measures can't be taken.  But the fears are misplaced; this is why:

The fact of the matter is that measures can be taken because Bitcoins are not traded in a vacuum, there are plenty of other mediums of exchange, everything from Yen to seashells.  Just as Stores of Value have not caused deflation in the last decades (because they have not been fixed to fiat currencies as they were in the 30's), neither will BTC.

BTC does indeed face some issues if it were the sole choice for being one's Unit of Account.  But there is no 'sole choice,' there are many choices.

I am not in favor of any Store of Value (Gold, BTC or other scarcities) being reinstated in a Standard system.  If people are given options, then the fears around using BTC as a store of value diminish greatly.  (Because employees will complain about there being fewer raises, etc, and employers will move to using USD as their Unit of Account.  Some U of A's may do well in one circumstance, while another would do best in another capacity.)

Finally, to address your statement:

No one will want to price things in bitcoin and bitcoin will never be more than a convenient replacement for a Store of Value like gold.

This is simply not true for the reasons you stated beforehand:  the lack of (necessary) transaction fees, the anonymity, and the convenience (speed and lack of red tape) in using BTC are three reasons of many that businesses and consumers would want to price and consume in Bitcoin.

Errata:
I also posted in the forums a couple weeks ago about an early psychological barrier that will be faced due to the lack of BTC's in circulation. http://bitcointalk.org/index.php?topic=4234.0

[marcus_of_augustus]

Modern economies tend to grow at 3% in the long run.

This is unsupported poppycock. There is no such thing as "the long run".

Economies lurch from one short-medium growth phase to another as new technologies come on-line, resources are found or depleted, wars, population demographics change.

Building a fixed inflation rate in to bitcoin would be a very bad idea, in the same way that the Federal Reserve inflating the dollar to oblivion was a very bad idea.
EDIT: the 'miracle' of compounding interest is the flaw, after n years the bitcoin supply becomes 21mill*(1.03)^n ... after 100 years your money is well on its way to worthless and your grandchildren are trying to explain to their children what happened to their 'savings'.

A potentially unlimited number of other crypto-currencies can be generated to satisfy any short term hankerings for easy "money", or you could just use dollars in your trades if an inflating currency is what you prefer to deal in.

[db]

Can't everyone who care about some arbitrary numbers and not the actual value just opt in to be paid in Venezuelan bolívars or something?

Or how about this: People with this psychological affliction can represent amounts in inflacoins (= BTC * 1.03^(year - 2009)) instead as they please. No need to change the underlying mechanics of the system.

[barbarousrelic]

The solution to 'sticky wages' is to educate people that the value of their wages is going up or staying flat, even if the number on their check goes down. I don't think this would be as hard as people think, especially if there were reliable statistics available on the price deflation rate.

[molecular]

Can't everyone who care about some arbitrary numbers and not the actual value just opt in to be paid in Venezuelan bolívars or something?

Or how about this: People with this psychological affliction can represent amounts in inflacoins (= BTC * 1.03^(year - 2009)) instead as they please. No need to change the underlying mechanics of the system.

As long as we don't build this crap into bitcoin itself, I don't care what people plug-in to it.

It might well be that bitcoin will in fact be used to a great extent to back other currencies. I keep thinking: bitcoin is more like gold than like fiat currency. People might back their "fungusDollars" with bitcoin to bootstrap value. But it's still a long way to there. First, I think, we need bitcoin to be used for trading a lot more heavily.

[db]

The solution to 'sticky wages' is to educate people that the value of their wages is going up or staying flat, even if the number on their check goes down. I don't think this would be as hard as people think, especially if there were reliable statistics available on the price deflation rate.

It's doesn't have to happen anyway. Average nominal wages don't go down because productivity goes up. There is still the same amount of money per person in the economy. Average nominal wages only go down when the population increases.

[ffe]

The solution to 'sticky wages' is to educate people that the value of their wages is going up or staying flat, even if the number on their check goes down. I don't think this would be as hard as people think, especially if there were reliable statistics available on the price deflation rate.

It's doesn't have to happen anyway. Average nominal wages don't go down because productivity goes up. There is still the same amount of money per person in the economy. Average nominal wages only go down when the population increases.

I hadn't thought of this. Your right barbarousrelic. Maybe wages don't have to fall. Does anyone know what productivity growth typically is?

If wages stay flat due to productivity growth and people get used to slowly falling prices, that just leaves holders of large assets like homes that are priced in bitcoins to suffer a slow loss.

(By the way a 3% growth in bitcoin is _not_ inflationary if the underlying economy is growing. There are 3% more things to buy at the end of the year. Or , if you prefer, there are newer better inventions to spend the extra 3 coin on.)

[kiba]

What make you thinks people in the bitcoin economy is going to stay at one job for a long time?

[ffe]

If wages stay flat due to productivity growth and people get used to slowly falling prices, that just leaves holders of large assets like homes that are priced in bitcoins to suffer a slow loss.

An interesting thought with a fixed number of bitcoin; Each coin represents 1/21millionths of the whole economy and as the economy grows the holder of 1 bitcoin still has claim to 1/21millionths of the larger economy. If a home is dropping in value (priced in bitcoin) then this just means it represents a smaller and smaller fraction of the total economy. So maybe it should fall in price.

Being worried about falling home prices may be just my old mindset coming from an era where homes were an investment. Seems silly. A home is a place to live, not an investment. Maybe in real life paying for a place to live does become cheaper with time as the economy grows.

(Of course you could never really buy the whole economy with 21M bitcoin. As you started to buy, prices would leap out of reach.)

[FatherMcGruder]

When we consider wages another problem intrudes. Normally an employer would want to lower wages periodically to reflect the fact that demand for “money” is driving up the value of bitcoins. Wages, however, are “sticky”. No one wants to see their salary lowered and will resist this. Real labor costs rise as a consequence and employers end up hiring fewer people. This has a negative effect on the economy as the amount of goods and services produced goes below potential. Again holders of cash are happy but unemployment is causing misery.

People could also abandon wages and take ownership of that which they produce by their labor. Perhaps bitcoin will facilitate outrage against the capitalist wage system.

[Meni Rosenfeld]

If wages stay flat due to productivity growth and people get used to slowly falling prices, that just leaves holders of large assets like homes that are priced in bitcoins to suffer a slow loss.

An interesting thought with a fixed number of bitcoin; Each coin represents 1/21millionths of the whole economy and as the economy grows the holder of 1 bitcoin still has claim to 1/21millionths of the larger economy. If a home is dropping in value (priced in bitcoin) then this just means it represents a smaller and smaller fraction of the total economy. So maybe it should fall in price.

Being worried about falling home prices may be just my old mindset coming from an era where homes were an investment. Seems silly. A home is a place to live, not an investment. Maybe in real life paying for a place to live does become cheaper with time as the economy grows.

(Of course you could never really buy the whole economy with 21M bitcoin. As you started to buy, prices would leap out of reach.)

This argument completely ignores divisibility.

Divisibility is irrelevant to the point ffe was making here. He could just as easily have said "the holder of 0.01 bitcoin has claim to 1/2.1Billion of the larger economy".

[db]

People could also abandon wages and take ownership of that which they produce by their labor. Perhaps bitcoin will facilitate outrage against the capitalist wage system.

After the Soviet Union collapsed factory workers were paid in whatever the factories produced. People found it very inconvenient:

https://www.economist.com/node/369396