Tokens, Policy, and Growth: Why the Government Should Like Digital Currency

[dddbtc]

Greetings all,

To begin, I'll state something that is probably rather obvious to any of you who talk with anyone who is not a bitcoin enthusiast:  

There is a disconnect between those who are well-educated in digital currency technology and those who are well-educated in economics.

For the past several months, I've been trying to reconcile this concept of digital currency with a few economists.  In general, the prevailing view I am met with initially is that bitcoin is a fundamentally disruptive technology (I don't disagree) and that it fundamentally runs contrary to the government and central bank (I do disagree).

Now, most of you are probably, at least somewhat, anti-government, anti-banksters, or at least anti-oppression and anti-corruption.  This is all well and good, I don't intend for what I present here to run against the community tendency towards Libertarianism, or to be political in any respect.  This is purely an academic model to demonstrate the case, not to necessarily advocate for any political agenda, policy decisions, or community action.

I assert that the innovation bitcoin brings to the table can help to promote economic activity and growth on a widespread scale without diminishing the central bank's capacity to maintain policy goals.

Now, this may seem contradictory, and I fully understand that.  Hopefully, after reading this, whether or not you agree with the veracity of the details, I'll have made the case well enough that the general assertions seem at least possible, if not plausible.  

To flesh out the case, we will first have to clarify initial premises:

1)  This model holds that the descriptive portion of Modern Money Theory (or neochartalism as it is often called) is the best representation of how existing Fiat economies function.  An introduction to MMT can be found here.

2)  There are some situations in which a free market can produce inefficient and socially undesirable outcomes when left to its own devices.

3)  Effective economic policy decisions from a central authority aim to correct inefficiencies and promote economic growth through the most non-intrusive method possible that still achieves these goals.  Functional Finance style approaches to policy action tend to accomplish this most readily.


Now on to the meat.  

To begin, I'd like to introduce you to a way of thinking about money I'll colloquially term "Numismatic Economics."  

I assert that the type of token circulated as a money in an economy can have an impact on economic activity and growth.  This tends to seem much more intuitive to bitcoiners than economists, for whatever reason.  It seems rather obvious to say that people will prefer to use the most convenient, cheap, and safe token available to conduct their transactions, and that the number of transactions they conduct may be influenced by the type of token they use.

Given that this is the case, and given that governments are able to enforce the mandatory acceptance of a token by vendors (legal tender laws) and create some sort of demand for their token via imposed tax obligations, we can say that the type of token a government 'forces' on the economy can have ramifications on the effectiveness of their policy decisions.

So I set out to create a framework that describe how this interaction might take place comparatively between single token systems as well as in multi-token systems.  The preliminary model I arrived at for the general case is available here.


In the context of this framework, it is easy to see how the addition of a bitcoin-like token circulating with the standard centralized electronic representation of the US dollar (the predominant current token at present) may push further the potential for economic growth, as it will tend to be cheaper to produce and transact, as well as having a significantly lower storage cost to users and anti-counterfeiting cost to the sovereign.  

All other things being equal, if a central bank accepted taxes in a digital currency whose blockchain that they could fork at will to effect policy decisions (likely through the coercive use of legal force), and if they correctly managed the rate of token production and the tax acceptance rate, economic activity could be effectively increased without diminishing the sovereign's regulatory capacity.

Be this desirable or undesirable in the context of our personal political viewpoints, the implication that a centrally-managed, decentrally-secured digital currency could viably interact with existing political entities in economically beneficial ways is significant.

If this sort of dynamic is accurate, perhaps mainstream economics can be convinced that digital currencies have real potential for use even within existing theoretical frameworks.



And, in a nutshell, I suppose that's it.

I'm interested in criticism on the model itself, as well as the concept it implies.  I'll attempt to answer all questions as promptly and thoroughly as possible, so please feel free to ask away.  Please attempt to keep discussion civil and academic, I look forward to hearing your thoughts!

P.S.  I reserve to right to moderate this thread as necessary, and all comments that are either overtly trolling or don't add any particular value to the discussion will likely be deleted.

[dddbtc]

You guys will generate 50+ pages of replies in every baseless price speculation thread, but I can't even get a single comment on this?

[dddbtc]

Last bump I'm going to give this.  I'm surprised no one can come up with anything to say back.

[LostDutchman]

Last bump I'm going to give this.  I'm surprised no one can come up with anything to say back.

OK.

Nice try but horseshit.

My $.02.

[Mike Christ]

I fundamentally disagree with the premise; I agree that the free market can sometimes fuck up, but this is because the free market is composed of people and there can be no descriptor of people which does not involve "prone to error".  However, I believe the point that must be made before proceeding is this: that people freely associating together are prone to error, whilst people involuntarily associating aren't, ergo a central authority over monetary policy can produce more desirable outcomes than without.  I don't see the difference; a man does not become more intelligent or wise when he has the opportunity to force another to follow his deed, in fact he often becomes less so, as every tyrant has shown.

Anyway, until it's shown that a central authority is not actually made up of people but rather, some other conscious matter that is not prone to error, then I must insist that the idea of a central authority over anything cannot produce any better outcomes than individuals acting in their own best interests.  Before bothering to consider whether a marriage between a decentralized digital currency and policy makers is possible, we should first ask whether it's necessary.  Assuming what I said prior is true, that a man vs. a man in a hat makes no difference in his ability to make error, then it can be asserted that it's unnecessary.  This is not to say economists are unnecessary; rather, they should focus on accuracy and wise recommendations so people can steer their own lives properly, rather than putting everyone on the same ship and steering it themselves.

[dddbtc]

OK.

Nice try but horseshit.

My $.02.

Thanks for responding, but I'm hard-pressed to believe that the entire model can be summarized in as little as 'horeshit'.  Did you actually read any of it?  If so, I'm interested in any genuine disputes you have with the content itself.

I fundamentally disagree with the premise; I agree that the free market can sometimes fuck up, but this is because the free market is composed of people and there can be no descriptor of people which does not involve "prone to error".  However, I believe the point that must be made before proceeding is this: that people freely associating together are prone to error, whilst people involuntarily associating aren't, ergo a central authority over monetary policy can produce more desirable outcomes than without.  I don't see the difference; a man does not become more intelligent or wise when he has the opportunity to force another to follow his deed, in fact he often becomes less so, as every tyrant has shown.

Anyway, until it's shown that a central authority is not actually made up of people but rather, some other conscious matter that is not prone to error, then I must insist that the idea of a central authority over anything cannot produce any better outcomes than individuals acting in their own best interests.  Before bothering to consider whether a marriage between a decentralized digital currency and policy makers is possible, we should first ask whether it's necessary.  Assuming what I said prior is true, that a man vs. a man in a hat makes no difference in his ability to make error, then it can be asserted that it's unnecessary.  This is not to say economists are unnecessary; rather, they should focus on accuracy and wise recommendations so people can steer their own lives properly, rather than putting everyone on the same ship and steering it themselves.

That's a familiar argument, and there's considerable discourse both for and against it.  However, that wasn't particularly a point I was trying to prove.

Namely, I want to show how the widespread use of digital currency might increase economic activity even on the Keynesian's own playing field.  That was the main intention of the whole framework, not to advocate for functional finance or central banks or government adoption or anything like that, but to show how even they would benefit from digital currency. 

Whether or not a people acting without a central bank benefit more from digital currency than those who use a digital currency associated with one remains to be seen, though I'm sure you have plenty of ideas about that too 

[Timo Y]

I fundamentally disagree with the premise; I agree that the free market can sometimes fuck up, but this is because the free market is composed of people and there can be no descriptor of people which does not involve "prone to error".  

Even a perfectly rational, error-free free market can fuck up, in the sense that it doesn't lead to the most optimal outcome of all possible outcomes.

Markets are dumb incremental optimizers. They often fall into social traps that are locally stable.  They are good at fine tuning once the starting conditions have been set, but they are totally blind to finding the "correct" starting conditions in the first place.  They don't see the bigger picture because they are incapable of cognition and design.

The situation for real markets is not as simple as that because the space of "all possible outcomes" is not static and  is itself dependent on previous outcomes. But there are a lot of cases in practice in which the above still temporarily applies.

To me, market intervention is justified if the existence of a social trap is easy to prove and there is a strong consensus among participants that everyone would be better off if the trap could be escaped.  

To me, things like air traffic control and other public goods are a no-brainer.  Monetary policy, not so much.  Sure, unemployment can be alleviated, but the problem is that nobody really understands the long term and unseen effects of interest rate and money supply manipulation. We are messing with a chaotic system. It might become even more unstable as a result of our intervention.  Also, there is a lack of consensus about an "optimal" rate of unemployment and so on.

I don't know whether democratic government is the best Leviathan. DACs seem like a promising and less error-prone alternative.  Anyhow, a good government should not be a decision maker but merely an executioner of consensus.  Thus it is incapable of making strategic errors in the first place.

[dddbtc]

To me, things like air traffic control and other public goods are a no-brainer.  Monetary policy, not so much.  Sure, unemployment can be alleviated, but the problem is that nobody really understands the long term and unseen effects of interest rate and money supply manipulation. We are messing with a chaotic system. It might become even more unstable as a result of our intervention.  Also, there is a lack of consensus about an "optimal" rate of unemployment and so on.

While there definitely is some dispute about optimal rates of unemployment (a few percentage points of dispute at most, however), there is certainly not dispute about unemployment being a cause of lost output, which is inherently detrimental to growth.

While I won't say that we are able to perfectly model the effects of monetary policy, or that central banks and policy makers get it right frequently (or even occasionally), I will say that systems with random variables can be dealt with mathematically to great success.  Stochastic processes, and, more specifically, Ito calculus, are very effective means by which an entity could measure and determine probabilistic outcomes of policy action and respond dynamically as they play out.  So, while it certainly isn't an simple or easily determinable question, there still exists the potential for answers outside of "we just don't know what will happen."  Whether or not we can accurately gather recent data on the those variables, however, is another story entirely, so there is a case to be made regarding incomplete and inaccurate information influencing policy decision and causing detrimental feedback cycles.   I believe this case is relatively strong, too.

I don't know whether democratic government is the best Leviathan. DACs seem like a promising and less error-prone alternative.  Anyhow, a good government should not be a decision maker but merely an executioner of consensus.  Thus it is incapable of making strategic errors in the first place.

I like DACs as well, and I'm also not entirely convinced that representative democracy is the most efficient system either.  However, I do disagree that consensus decisions are error-free.  There are a lot of arguments even in basic economic game theory that suggest unrestricted group consensus can, in some cases, produce less desirable results than restricted group consensus (i.e. the classic example where a system's nash equilibrium leaves both parties at a zero gain instead a higher collusive gain because of some larger profit providing a motive to cheat).  There are a good number of relatively popular strong empirical arguments that have been presented over the years demonstrating this.  Ultimately, it sort of boils down to what degree a government's actions are based in political vs economic philosophy.

Good commentary though, Timo.  Out of curiosity, what do you think of the model and assertions in the OP?