Hyperbitcoinization Won’t Happen Because Political Economy is Important
Barely anybody I talk to understands what the term political economy means. But it is quite possibly, one of the most important considerations in macroeconomic analysis. It is something I spend a lot of time thinking about — although I am not academic expert on the subject. It is a particularly esoteric branch of the political sciences. But in my estimation, it’s many times more important than the properties of money in terms of giving us a perspective of what might be true about the future of money and the economy.
Political economy is an interdisciplinary field that focuses on the relationship between politics and economics in society. It is focused on how political institutions and the political environment more broadly, and the economic system influence each other. To emphasize this last point, it’s focused on the complex interplay between how not just economic forces, but political actions influence each other.
One common sentiment I see in conversations around bitcoin, is that bitcoin represents an overpowering force on the economy and politics that will render state-issued fiat currency unfeasible in the future, because the benefits of holding bitcoin will outweigh the benefits of using fiat currency for everyone. Some take this position, and extrapolate a terminal theory that this will bring about the end of the state. Or in some more moderated versions of the theory, hamstring the state’s ability to make war, manipulate money and credit, and relegate it to a frugal night-watchmen state. This future is commonly referred to in bitcoin circles as hyperbitcoinization. To its adherents, it’s inevitable; bitcoin is the most perfect money ever created, and according to Sir Thomas Gresham’s eponymously-named Law, “bad money drives out good”, therefore the value debasement that is associated with the expansionary monetary policies of fiat currencies, will lead to a natural flow into bitcoin, which no system of laws or political culture can resist, because bitcoin’s properties make it, in effect, beyond legal regulation and unstoppable.
It’s a seductive viewpoint. It speaks to the classical liberal or libertarian impulse towards ultimate economic emancipation from the state. The problem, of course, is that it presupposes that this tendency is relatively universal in people. And beyond that, even if it isn’t, the existence of bitcoin will create economic incentives that in some self-propagating way will destabilizes the state’s control of economic behavior in a catastrophic way. In other words, bitcoin is a thermonuclear weapon that overpowers all political economy factors.
You probably can already guess — and if you’ve read my thoughts elsewhere, know — that I’m not terribly sympathetic with this view. I’m not sympathetic with either the view that there’s any inevitability to it, nor am I sympathetic to the view it’s even desirable.
One of the common arguments that is made is that bitcoin represents a form of ultimate property right. That is, bitcoin is beyond seizure. For the very reason that, with twelve words stored in your memory, nobody can compel you to hand over your bitcoin. This is implied to have dire implications for the state’s ability to raise revenue, and therefore maintain the breadth of economic rent that is currently typical of modern states. Beyond this, it is implied that populations will reject, by popular opposition, the idea that the state can demand payment for taxes in a currency of its choosing. Essentially, the assumption is the mobs will love bitcoin so much, that the mere proposition that say, in the far flung future, a US Government demanding payment for taxes in US Dollars would be so politically unpopular, that the population will take to the streets en masse to reject. It will be seen as an unthinkable vestigial evil: fiat money.
This is what the hyperbitcoinization narrative would have you believe, anyways. As you can see, it’s taking a lot for granted about what they think people want, and will want. It’s assuming, among other things, that people will accept the removal of the welfare state, as a necessary tradeoff for avoiding the evils of inflatable currency.
Some hypothesize this will have the healthy side-effect of undermining the ability of states to maintain large standing militaries capable of projecting power, and so world peace will become a happy accident of this revolution.
But once again, this all rests on the assumption, that along the way, people will come to see that the benefits of holding hard currency with twelve words in their heads, that the economic, cultural and political benefits will outweigh whatever benefit we derive from the system we have today. In essence, it relies on the thinking that the free market and charity will replace the functions of the welfare state. There will also be a realization among the people that the functions of national security — largely seen by people who advance this narrative — as unnecessary, corrupt elements of authoritarian power better left behind. In essence, it assumes a fundamental goodness about human nature that will flourish, through peaceful market forces.
It’s a beautiful vision. It also just ignores a lot of stuff. It ignores a lot of what we know about human nature. It ignores a lot about what we know about how modern markets function. Maybe most importantly of all, it ignores what humans want. In fact, it presumes what humans will want once they “study bitcoin”. It’s a surprisingly pretentious view when you frame it in these terms. Simply, it assumes a libertarian predilection in the human spirit that will come out of its cocoon, once un-mired by the propaganda of the fiat system.
It’s not surprising then, that most of the economic theory (and I’m being generous by calling it that) in hyperbitcoinization circles, is largely based around assumptions that the emergent preferences of markets will tend towards ones that maximize individual economic rights. The free market’s spirit of libertarian revolution is being suppressed by the knee of a corrupt economic elite, benefiting from printing money, and controlling corrupt institutions from the top — if only the government would just get out of the way, this would all happen naturally.
One of the problems with this view, is it does lead one to question why is it, that given the predilection for markets to maximize wealth creation, why there isn’t any substantial lobbying or push for such a thing. The prevalent theory in hyperbitcoinization circles that has been recounted to me, is that it’s because “people don’t understand bitcoin yet”. Which once again, is highly presumptuous. In other words, “if they knew what I know, then they would think like me, and want the same things I do”. Thinking this, it’s easy to jump into paranoid thinking about a corrupt elite that is suppressing the knowledge of the true evils of fiat system, that is key to the economic emancipation of the masses.
It is, quite simply, a cartoonishly simple view of political economy. It doesn’t interface with interesting questions about how property rights work. Instead, there is this happy notion that bitcoin revolutionizes property rights. But does it?
What about “twelve words in your head” protects your home from seizure? What about “twelve words in your head” protects you from theft of your physical posessions? How are disputes around contractual property claims mediated, and how are the results of those mediations enforced? You sometimes hear crazy notions around digital contracts being the solution for this. But even then, it’s still not clear to me what that means in the real world. So you have a title deed to your home in a smart contract. If you lose access to it, or your kid grabs your phone and transfers it to some guy in Oklahoma, you just don’t own your home anymore? Where is this revolutionary shift in property rights coming from, exactly? All you’ve done is proven I can’t take your bitcoin from you, as long as you’re willing to die instead of give up your twelve words, while you’re beaten to death for them in a damp, dark room with a single lightbulb hanging above you, hog-tied to a chair. Do I need to go on? These arguments are not terribly complicated and make no contact with a lot of really practical problems, that our current system of property rights handles pretty well. With laws, courts, and sheriffs.
So from a political economy perspective, why is it that people are going to be okay with say, stolen property — in financial assets or title deeds — being beyond the reach of government? I tend to think most people quite like it when the government gets their stolen property back for them.
Another problem is that the welfare state is actually really popular. People want government-subsidized healthcare. People want food programs and direct-transfer programs for the poor. People want social security programs for retirees. Just look at opinion polls in the United States. Even among Republican voters — who are often associated with being opposed to these programs — these things maintain a high-degree of popularity amongst people. Perhaps they differ from Democrats on how big these programs should be, the kinds of means testing that should gate access to them, and whether there should be some form of privatized delivery of the services, but they still believe these programs should exist.
When I’ve brought this up to people, the most common retort to this, is that the fiat system exacerbates the wealth disparities that necessitate the need for these programs in the first place. Given say, the deflationary price pressure that a fixed-supply of bitcoin will provide, it will be much easier for everyone to accumulate wealth, and with more market competition, the cost of living will get so low, that what little economic squalor remains can mostly be handled by charity. Personally, I think this is a highly fanciful form of thinking. It just kind of asserts Smith’s Invisible Hand will take over from the welfare state. And everyone will embrace this new order, having “studied bitcoin”.
Beyond this, as I argued in a previous post, it also just casts aside all contemporary economic theory, and concerns about market failures, externalities, liquidity traps and demand destruction spirals. Bitcoin will create a perfectly, stable market, reducing the necessity or the demand by the general public for market regulation, and credit creation. In other words: bitcoin fixes everything.
The arguments for hyperbitcoinization take a lot for granted about the kind of world that people want to live in. It assumes that people will see little value in the government’s role of trying to provision for public goods. That people will embrace a hyper-privatization of the world they live in. They will prefer to lick their wounds during times of economic crisis, and endure higher levels of business failures as a bad tasting medicine, cleansing ritual of creative destruction. People will understand the pain is worth it, because they’ll know this outcome is the most pure and moral. Hard money that can’t be debased.
I’m sorry, but I just don’t think we’ll ever build a political economy around that idea. If for no other reason, is it’s small, and there’s nothing human about it.
