Bitcoin, Entropy and Steve Keen’s Elusive “Dis-Saving Entity”
In a recent talk, economist Steve Keen makes the case that ‘saving’ has conflicting economic impacts at an individual level with those at an aggregate societal level because in the latter, it reduces GDP and creates current account imbalances amongst trading nations. As far as it goes he makes a well argued and compelling case.
However, to anyone with an intuitive sense of “value” it’s difficult to ignore the confined scope of this type of analysis which restricts itself to a numerical domain comprising largely bank deposits and other currency-denominated bookkeeping movements.
Addressing The Catch
To solve the deflationary “catch”, Steve argues for finding a “dis-saving entity” that’s capable of sustaining an effective negative savings balance which compensates for the parked, private capital no longer contributing to GDP. The fact that this quest ends up at the gates of a Central Bank is again well argued but largely a self-fulfilling prophecy given the way the problem is framed as a national currency accounting excersise.
When Steve cited the idea of a “net dis-saving entity”, it occurred to me that such an entity could only lie beyond the domain of national accounting “tricks”. This is because fundamentally, the only entity with a surplus of real resources to donate to the cause is the planet itself and its wider celestial context given that the sun is our main energy resource. As such, we may need — philosophically at least — to account for the existence and impact of “savings” in some much more fundamental unit before considering the national accounting view.
“National” vs “Natural” Bookeeping
The property of Entropy (from thermodynamics) could be considered a viable candidate and often has. (Google “entropy” and “money”). In fact it’s probably the most fundamental of all natural accounting units available to us since when we are doing work such as taking sand and cement that’s lying around and building a school with it, we’re more generally facilitating a localised entropy reduction. The term “work” in other words relates to swimming locally against the tide of the 2nd law of thermodynamics where all work transfer in the universe results in increasing entropy. Entropy is therefore a derived, abstract property just like “money” which genuinely accounts for life-sustaining value without recourse to bookkeeping “toys” such as debt or credit which carry no new native value on their own.
With this in mind and returning to Steve’s talk, he points out that “savers” reduce GDP at an aggregate level. However this is only true in the strict sense of withdrawing national currency from circulation and holding it in deposits.
On the other hand if you define “saving” as swapping one instance of historical “entropy reduction” for another then the national currency that you used to facilitate that exchange stays in circulation. An example would be building a house (an entropy reduction activity) and swapping it for gold or some other commodity whose creation had displaced a similar amount of entropy. There’s no net “negative equity” for the saver, no net “positive equity” for the banking system and no aggregate “book-keeping” deflation.
The “Dis-Saving” Entity
In his presentation, Steve Keen acknowledges the genuine motivations for private saving but he notes that since it reduces GDP we need to look for an entity that has the long-term capacity to support a net “dis-saving” balance to counter the negative aggregate deflationary impact on the economy. His suggested solution is that governments can do so because they “own” central banks which do not end up in (numerical) negative equity when they monetise government debt. But this is not quite satisfactory in a broader sense because it doesn’t address the entropy gradient resulting from the exchange of low-entropy property for high entropy entries in accounting ledgers. (Put another way, savers exchange costly economic work for cost-free bookkeeping contracts when measured in “natural value” units).
What then is a Proof-of-Work blockchain from this natural accounting perspective ?
It’s an entropy sink. In other words it’s the authentic version of the “net dis-saving entity” that Steve’s looking for.
The Bitcoin network and other Proof of Work blockchains are a pure record of entropy reduction that can be swapped for utility capital temporarily, leaving both the individual saver and the economic collective square in terms of entropy balance. i.e. If a saver swaps national currency for bitcoin instead of “parking” their money in a deposit account then the national currency stays in circulation and the planet gives up entropy in the role of net dis-saver instead of the central bank. The alternative is a deceptive numerical exercise which doesn’t do justice to the intuitive concept of saving since it mis-prices the savings base and consequently the opportunity cost to society of “parked capital”. That in turn creates an enormous wealth disparity which reflects the asymmetry of “bookkeeping liquidity” and “real capital” in favour of the entities responsible for creation of the former and at the expense of the wider economy who create the latter.
This stark asymmetry is indeed what we now observe.
Blockchain Energy: Waste or Utility ?
When it comes to the role of energy expenditure in creating bitcoins, there’s no ambiguity in Steve Keen’s vision. Consistent with most institutional appraisals, it’s seen as redundant since why would you incur mining costs when bookkeeping entries come free of charge ? That’s a fair question, but is at the same time the whole point of “Proof of Work.
Listen from minute 47:15
https://soundcloud.com/what-bitcoin-did/debunking-economics-and-why-bitcoin-will-fail-with-steve-keen#t=47:15
The attribute identified by orthodox economists as bitcoin’s “fatal flaw” is in fact an essential component of the crypto-asset savings base. Since entropy reduction is a bi-product of energy transfer, our “entropy sink” (Steve’s “dis-saving entity”) couldn’t exist without it. Expressed another way, the energy budget of the blockchain is simply idle capital showing up differently to how it does with the incumbent debt-based system. We incur this cost already just hidden away in the future (in the form of the debt) or in the present (through the devaluation of working people’s assets via the absurdity of even-handed valuation of future and past productivity).
The blockchain energy budget makes these costs explicit and addressable in realtime instead of “debt time”. It also restores fair value for savings without recourse to central bank monetary policy while solving Steve’s “austerity” problem at the same time. At some point, the blockchain will contain enough entropy balance to reach equilibrium with the economy’s monetary needs and the “pressure gradient” will level out. This scenario is also anticipated by the coin emission curve so it isn’t a “bottomless pit”.
However, nor is it a monetary vehicle that can be constructed with “accounting entries”. Otherwise it would have been useless and valueless.
