The Willful Ignorance Of Media Economists
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If you’re the editor of a mainstream newspaper – say, Britain’s Guardian – who do you turn to for expert commentary on cryptocurrencies? An economist, naturally.
Newspapers and websites are increasingly desperate for someone, anyone, to explain the crypto phenomenon to their readers. Why? Because their audience is interested.
But in their quest for an authoritative voice, these outlets are missing an important point.
Permabear economists are some of the worst people on earth to comment on cryptocurrencies.
Professor Kenneth Rogoff of Harvard University declared in Monday’s Guardian that according to “The evangelists… bitcoin can still be incredibly valuable as long as enough people perceive it as digital gold. After all, they argue, money is a social convention. But economists (including me) who have worked on this kind of problem for five decades have found that price bubbles surrounding intrinsically worthless assets must eventually burst.”
An “intrinsically worthless asset” is something that economists like Nouriel Roubini see as the key to Bitcoin’s identity; omitting to note only that you and I may agree that it has worth, and that it therefore has worth… as long as we continue to agree. That’s not a mere social convention, that’s a fact.
Intangibles have worth. These may be a pair of black leggings to you and me, but to my daughter the word “Lululemon” means they’re ‘worth’ $100. Value is mindshare.
And human traits, like loyalty have worth – and even a currency. Air miles.
Why do cryptocurrencies deserve the attention of economists?
Stephen Dubner and Steven Levitt of Freakonomics fame have discussed in some detail the failings of classical economics in microeconomic conditions related to social phenomena. They have explored the economics of cheating in Sumo wrestling, the causes of violence in drug gangs, the correlation between the Roe vs Wade decision and the decline in crime.
In each case, the microeconomic climate could not be explained through the currently-predominant Mainstream School of economic thought that (in essence) considers supply and demand through tradeoffs between selfish entities based on the scarcity of goods or services.
Monetary supplies are inflationary; participants are self-interested; and globalization has reinforced the concept of macro trade-off theory. A post-industrial philosophy such as Marxism is anathema to many modern economists, because it doesn’t account for a global economy with financial services at its core. But what about a post-technological philosophy?
Cryptocurrencies are an emerging economic force that do not fit within this Mainstream School.
Firstly, they do not require a physical asset to back them. This has been described by some economists as a weakness, although it is common knowledge that the U.S. Treasury is not fully-backed by gold. Banks operate on a leveraged basis. This is normal behavior in an economy but Mainstream School economists seem stuck with the idea that trust can only be created by physical escrow (a problem that smart contracts, and multiple blockchain projects, are helping to solve.)
Secondly, main cryptocurrencies (notably Bitcoin) are non-inflationary; this stands in stark contrast to current expectations of monetary supply. Supply is limited; the Proof of Work consensus may not be perfect, and economists often froth at the mouth over the supposed ecological impact of energy consumption (while simultaneously overlooking it in almost every other industry). And Economists are still wrapping their heads around divisibility instead of multiplication.
Thirdly, and most importantly, cryptocurrencies are as much a social phenomenon as an economic one. The democratization of financial access means that traditional drivers of economic power – governments and banks – are not the exclusive gatekeepers of arcane information. We are already a world in which social interchange has shifted; Millennials can hardly conceive of storing photos in albums, or collecting music on CDs. Digital value is part of our shared experience.
So what has this shift meant throughout history?
Historical precedents for revolutionary change
An expansion of information availability has almost always resulted in major economic change. From Gutenberg’s printing press and the Renaissance to the Internet – with its social effects on everything from oppressive regimes to Snapchatting teens and the globalized supply-chain efficiencies that allow brands to serve them – information changes economics.
Cryptocurrencies represent a combination of revolutionary factors that have traditionally resulted in major societal change. An example is included after each point. Note that major revolutionary change usually comes about as a result of multiple factors.
- Informational: Cryptocurrencies prevent gatekeeping institutions from guarding empowering knowledge. (Printing press.)
- Distribution: They are driven by news virality rather than by top-down information dissemination. (Arab Spring.)
- Inevitability: They are backed by social forces that are already at work. (Rise of Fascism or Facebook.)
- Technological: They are enabled by technology that is open-sourced or has a reasonably low barrier to entry. (World Wide Web.)
- Financial: They have the potential to create wealth for participants. (Stock markets.)
- Demographics: The early creators are males aged 25-34. (Music – traditionally, though not so true following the feminist revolution.)
- Usability: They display clearly superior characteristics to existing means of economic exchange. (Globalization of the supply chain.)
The characteristics of cryptocurrencies clearly portend revolution – if not socially, or politically, then possibly financially, or through any combination of the factors mentioned above.
And yet pop economists repeatedly decline to comment on cryptocurrency’s emergence as a revolutionary economic force, concentrating instead on current prices or (admittedly flawed) incarnations that may be usurped.
They are surely aware that economics as a discipline must adapt to fit reality, not just model a version of it that fits the inherited belief system – and that the earliest adopters in any revolution are the cells; the body politick takes time to absorb them into the bloodstream.
So why aren’t we seeing more thoughtful commentary on cryptocurrencies from the leaders and thinkers in the Nobel field of economics?
Are they genuinely so closeted that they can’t see the imminent revolutions that will be powered by cryptocurrencies?
Or are they afraid of them?
The author is invested in digital assets, and intends to stay that way.