Ever since I got the Bitcoin bug, I have been thinking about money like crazy, sometimes coming up with really stupid ideas, sometimes hopefully being more right than others, reading many of the Austrians, but always trying to figure out what is the theory that best could explain Bitcoin’s existence. The stock2flow ratio always made a lot of sense to me, but I’ve always wondered why scarcity meant value in the first place and I think I have finally figured out why.
Everything has to do in one way or another with the most scarce resource we have: the time of a human life. I argue that all economic calculations are done taking into consideration the time needed to carry something out because time is present in every single good and every other resource present is also a function of time too.
Time is therefore the universal currency and everything can be obtained or manufactured with the sufficient amount of time. But time has a problem: you can’t exchange it.
Throughout history we have needed a way to represent the time that both sides of a transaction could exchange and with which we can reach an agreement about the “time valuation” of a good. That’s what I’m reaching the conclusion money is all about, i.e. time valuation, and it is more demanded the more scarce it is, as scarcity represents a longer time needed to obtain it. Scarcity is therefore a measurement of time, and time a measurement of value.
In fact, the article by Nick Szabo “A measure of sacrifice” rang a bell to me when I realized all the work people have been doing throughout centuries in order to coordinate and synchronize around time. Money is therefore, another way to coordinate around time and being able to exchange it.
Actually we look for a exchange in utility first. If for example I have my lamborghini but I am so thirsty that I am about to die, and someone is interested in my lambo and offers me either $1m or 1 litre bottle of fresh water, I’m very likely to choose the latter.
But if there is no coincidence of wants, we will look after a good that allows us to measure time.
In order to work properly as a measurement of time, a good has to be a STANDARD measurement of time. This means that it has to be universally equally scarce for everyone. If someone can develop some understanding or knowledge that allows them to really manufacture or obtain more of that good in the same time, then it won’t be as easily accepted as money. In other words, what technology is all about is time saving, and if more of a good can be obtained through technology, then it is not useful as money.
Let me explain in a very simple example how an exchange would take place according to this theory:
- Alice sells a couple of shoes to Bob that take her 2 months to manufacture because she has developed a special knowledge and skill about this process.
- Bob has no idea how to manufacture shoes and estimates it would take him beyond 10 months to get them done himself.
- A 1 gram piece of gold takes both Alice and Bob approximately 5 months to find. Both know the time it takes each other to find that 1 gram piece of gold, because they know that gold is equally scarce for everyone. Being standard, gold transmits information of the time needed to obtain it as a result. You could be lucky and find that piece of gold in 4 months instead, but as an estimation of the time needed to get it, gold transmits the information “that piece of gold represents a length of time longer than the time it took me to manufacture my shoes, it is a proof of more work than what my shoes are for me”. Should he pay with any good other than gold, Alice would have no way to know how much work Bob put into obtaining it. It would be difficult to know if the exchange is therefore fair. With gold, she knows with a high degree of certainty. Error in the economic calculation is therefore minimized with a standard measurement of time.
- So Bob pays Alice 1 gram of gold, and he is happy because he obtains something that would take him more than 10 months to manufacture, paying in exchange something that would typically take him 5 months to find.
- And Alice gets 1 gram of gold worth 5 months of work, in exchange for two pair of shoes that would typically take her 2 months to manufacture. She is also happy as a result.
Please check Mr Friedman’s explanation in this short video I’ve just been made aware of:
This is exchange, and it is beneficial for both sides despite not existing any coincidence of wants, as both sides “save time” compared to what they had before the exchange, and progress is created as a result. Both benefit from the difference in the knowledge and skills of each other. We end up being able to do more in a lifetime that we would otherwise, had we not had any money to exchange with, and therefore progress is actually about saving time. In other words, money allows us to benefit from the knowledge acquired by others. Money allows us to transmit the benefits of knowledge and skill development so that the entire society can progress as a result.
If “The selfish gene” theory is right, we don’t look for utility in a transaction, but fairness, justice or rather reciprocity.
It’s almost like using a meter to measure the size of a good before exchanging it. Instead of a fixed length, it needs to have a standard universal scarcity everyone knows about. If it also has other properties that make exchange easier such as divisibility, transportability, etc… then it will be even more demanded as a result.
While with gold you could develop some particular knowledge about the location of pieces of gold and keep it in secret for a while, Bitcoin is the only good that is universally scarce for everyone.
Nobody can develop some special understanding about that could lead them to get more bitcoin units per unit of time. It is simply impossible for as long as the current algorithms keep working flawlessly. The only way is having saved time before (saved money) and investing huge amounts into mining facilities, or otherwise borrowing it at an interest rate (you could argue this interest rate is the cost of saving time).
This turns Bitcoin into the best standard and exchangeable measurement of time there is and as such, as the best form of money ever.
The driver of adoption is therefore according to this theory, not as much the fact it is scarce, but the fact it is universally scarce for everyone. That and the other properties we all know and love, are what is going to inevitably turn Bitcoin in to a moneyness black hole.