Universal Basic Income and Bitcoin

Recently I received a deluge of criticism for the statement “If you understand Bitcoin then you support Universal Basic Income”. This statement was seemingly obvious but was derided as being moronic and non-sequitur. Even when prefaced with the statement that those that are against Universal Basic Income (UBI) generally don’t understand economics or money. The sequential logic here being Bitcoin relates to understanding money relates to understanding economics relates to economic policy = UBI.

Before going any further make sure you are familiar with the distinctions between money, wealth, currency, money supply.

The summary of my statement boils down to the fact that “money” is, or creates, an information system for efficient allocation of resources. This could be called the MoneyNet to disambiguate it from the actual money (but with Bitcoin it is the same thing). N.B. It seems to be the same as an economy, but that seems broader that the definition of just the information contained in the ledger graph.

If you understand the idea of the MoneyNet and also understand that wealth is created primarily through trade then it is obvious that you want as many participants as possible to act in the network for efficiently allocating resources (particularly when the medium of exchange is deflationary and the power of the network is valued at the square of its participants). With a fixed, but infinitely divisible money supply, wealthy people actually benefit in many ways from UBI;

  • Increased trade in the economy by including poor people that must trade to survive.
  • Increased demand of the money supply raising the per unit value.
  • Greater societal wealth from increased trade and more efficient allocation of resources.
  • No poverty!

A good shorthand thought experiment for this is to look at the depression. During that period there were many people without jobs — not due to the fact that there was no work that could be done to create wealth, but because of the poor distribution of money had resulted in the medium of exchange used for trade being locked up by the wealthy. The use of alternate local currencies unlocked this impasse very successfully.

So why is trade important? Because trade is the voluntary exchange of goods and services. People engaging in trade must be willing to bear a cost (give up something). Therefore, we know that people will only participate voluntarily when both expect a gain greater than the cost from the exchange. If even one of the trading partners believes he cannot gain, the exchange will not take place.

Now Bitcoin rethinks money as purely being the ledger to facilitate trade. It achieves this by instantiating the entire economy (of the community; but for the thought exercise lets assume the entire economy) with 21 million units. It isn’t 21 million today, but the nuts and bolts of how Bitcoin works up to that isn’t relevant for the economics lesson/ thought experiment.

If we assume that all the Bitcoin exists today, and that all states use this currency, regardless of other money stock in existence. We assume that the wealth distribution is as it is today with a fair degree of poverty and large amounts of people below the poverty line unable to participate in the MoneyNet information network, unable to create the gains of trade for themselves or for businesses that could serve them.

We then introduce a redistribution of taxes for UBI, paid in Bitcoin (not artificially injected into the money supply via money printing). The result is that everybody is above the poverty line — if you are still in poverty after this, then the charity of others will surely be harder to come by.

The new distribution of money will allow the wealthy to save it or use it for trade, and will allow those of basic means to spend it — thereby created wealth overall. Wealth for themselves, and wealth for the businesses that served them. The redistribution also serves to increase the demand for currency, thereby increasing the unit value for the entire population. In this way, the rising tide lifts all boats.

Now if you imagine this scenario again playing out with a fiat currency where money for redistribution is printed into existence, this effectively robs the wealthy savers via inflation. Some people see that as a good thing since inflation too encourages spending, thereby increasing trade — but in reality savings just accrue in other arenas of wealth management, and other forms of money that are deflationary/ stable — eg. housing. They also see savings as bad because, like in the depression, it locks up the medium of exchange. In the case of Bitcoin, where you have infinite divisibility, this isn’t true. Saving increases the value of the unit, but doesn’t decrease the availability of it for trade — in this way, there are more things that can actually be traded since the total ‘market cap’ is higher.

This doesn’t mean that UBI can’t work in a fiat currency economy, it is just easier to visualise a complete money information network in a Bitcoin economy because there are less moving parts. If taxes were used for UBI in a fiat currency setting, or at the very least, if it was achieved without changing the use of the money printing lever, then economies would works as per usual, with the added benefit of less poverty and increased trade — at the very least from those who needed it.