Paul Krugman picked the wrong geeks to mess with. His recent potshots at Bitcoin made him an easy target for Bitcoiners. As a rabid Bitcoin evangelist myself, I gleefully participated in Krugman-bashing on Twitter. All in good fun. I don’t take Krugman’s opinion on Bitcoin seriously anyway, especially when he’s just kidding. Gee, nice try, sir!
Anyway, I’m not here to insult and make fun of Mr. Krugman. In fact, I think that he is unfairly mocked by Bitcoin fanatics. Yes, he had that coming. But my intention here is to elevate the conversation to another level — a more intellectually honest level of discussion on Bitcoin economics.
As Mr. Krugman wrote on his blog:
But then, they do seem to be a humor-impaired bunch. I’ve been getting rage-filled missives about the title of my last post on the subject. Folks, there’s this concept you may not have heard about, called a “joke.”
And it’s not just BitCoin. When I think about the various debates I’ve been engaged in over the past five years, what’s striking is how furious and huffy the other side gets when people like me use picturesque language to get a point across — “confidence fairy”, “zombie idea”, and so on. As in other matters, this is not symmetric. I get called a lot of names, but so what? The argument’s the thing.
Fair enough. I’ll put the “rage-filled missives” aside and dig deeper into this issue. Krugman’s central point in his “Bitcoin is Evil” blog post is this:
So far almost all of the Bitcoin discussion has been positive economics — can this actually work? And I have to say that I’m still deeply unconvinced. To be successful, money must 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. Brad DeLong puts it clearly:
Underpinning the value of gold is that if all else fails you can use it to make pretty things. Underpinning the value of the dollar is a combination of (a) the fact that you can use them to pay your taxes to the U.S. government, and (b) that the Federal Reserve is a potential dollar sink and has promised to buy them back and extinguish them if their real value starts to sink at (much) more than 2%/year (yes, I know).
Placing a ceiling on the value of gold is mining technology, and the prospect that if its price gets out of whack for long on the upside a great deal more of it will be created. Placing a ceiling on the value of the dollar is the Federal Reserve’s role as actual dollar source, and its commitment not to allow deflation to happen.
Placing a ceiling on the value of bitcoins is computer technology and the form of the hash function… until the limit of 21 million bitcoins is reached. Placing a floor on the value of bitcoins is… what, exactly?
I have had and am continuing to have a dialogue with smart technologists who are very high on BitCoin — but when I try to get them to explain to me why BitCoin is a reliable store of value, they always seem to come back with explanations about how it’s a terrific medium of exchange. Even if I buy this (which I don’t, entirely), it doesn’t solve my problem. And I haven’t been able to get my correspondents to recognize that these are different questions.
So, in short, Krugman’s main question is: Why is Bitcoin a reliable store of value? (emphasis mine). I don’t think Krugman is arguing that Bitcoin has no intrinsic value (well, I hope not!). This is actually an excellent topic for economists to hash out and dive deeper into. It seems to me that Krugman is attempting to separate the Bitcoin as a currency aspect from Bitcoin as a protocol/platform. And therein, lies his mistake. Bitcoin by itself has no intrinsic value, let alone a reliable store of value. The value of Bitcoin is co-created by its decentralized protocol and the network of people who believe in its value. An excellent analogy here is that of a telephone and telecommunications infrastructure. By itself a telephone is useless and is only good as a paper weight. But once connected to a telephone network it becomes very valuable.