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It isn't that Paul Krugman doesn't understand economics; it's that he doesn't fundamentally understand Bitcoin.
The public has witnessed Krugman (and other economists) propose arguments against Bitcoin that, frequently, if not entirely, concern use cases fit for the definition of "money", as it exists and is used today. In providing commentary on Bitcoin, Krugman will regularly call out Libertarians and ridicule the gold standard. He may even mention that pesky, awkward concept of “intrinsic value”. If you’re lucky, Krugman might share some enlightening words of wisdom, like “we already have credit cards for that”. You probably won't learn anything, of course, but you will be entertained!
And yet anyone today, with basic search engine skills, can educate themselves on an entire spectrum of Bitcoin use cases, many of which have little or nothing to do with money. Some of these leverage one particular attribute of the secure blockchain, like immutability. Proof of Existence is one such example - (proofofexistence.com).
Other potential use case cover the entire gamut of topics...
p2p mesh networks
digital content attribution and transfer
resource allocation (via injecting market dynamics)
This isn't a fantasy thought experiment. Many of these potential "killer apps" are being aggressive financed and commercially pursued today. Some are tackling very expensive problems that impact productivity (like spam mitigation). In these areas and others, there is massive potential for value creation
And yet many economists appear to dismiss, absent of any real consideration, these Bitcoin use cases outright. They’ll make arguments concerning “intrinsic value” (or utility) that make no reference to any potential use case beyond how fiat is used today. Krugman will talk about online consumer purchases; he’ll talk about banking, about economic policy, inflation rates, the horrors of "hoarding". And this is where the gravest of errors begins...
For if Bitcoin, fundamentally, is just about “money”, then its utility will be considered on those merits alone. These other potential “killer apps” won’t surface in discussion, and the extended absence of their discovery will be passively reinforced. One may even develop a sort of dogmatic conviction, based less on the merits of the actual innovation and its real-world utility, and more on things like the inflation rate, economic policy and, of course, the horrors of "hoarding".
Imagine for a moment that you're constructing a new house. Debating in this manner is like attempting to construct the second floor before you've put in the foundation.
And yet these Bitcoin use cases all have something in common; they all typically required trust
. While machines today may run deterministic code, with a predictable output, humans certainly do not. We're autonomous agents in the decision making process, and the “code” we compile cannot be audited by others . Such is the nature of the human mind and the magic of subjectivity. Others must trust
that our output (action) is what they expect. It is this “friction” - this immutable nature of human interaction - that Bitcoin is really
about, not just “money”. It just so happens that the concept of money is very tightly intertwined with the concept of trust. Therefore, we might be better conceptualizing this use case as “value transfer”, without restricting ourselves to “money". Humans value many things, of course - consumable goods, intellectual property, personal identity, family, financial assets like stocks and bonds, etc.
Ultimately, we must consider Bitcoin’s utility across this broader spectrum. Because Bitcoin is young, many of it’s “killer apps” may not reach mainstream for years, maybe decades. As an helpful analogy, consider the successes of the Internet. Some of the “killer apps” that inevitably came along, like Uber, took quite some time. In Uber’s case, it required the eventual emergence of another innovation - smartphones - and their rapid rise to ubiquity. I see no logical reason to believe that Bitcoin’s “killer apps” won’t roll out in a similar manner.
There are potentially 1000s of Bitcoin use cases that might demonstrate real utility in practice, addressing trust at scale.
Perhaps only a handful will eventually turn into “killer apps”, but that’s ok. In fact, it should be expected. Those that do will provide real utility to society. Since these use cases will consistently require “bitcoins”, and since those bitcoins are scarce, it logically follows that they will (and should) command a market price. Anything that is both useful and scarce will command a price. The only logical way to argue that Bitcoin, and “bitcoins”, lack utility is to argue that every single use case suggested, and many more, lack real-world utility. But given the fundamental importance (“value”) of trust, and the potential utility of a “trustless” protocol at global scale, this seems, if not overly pessimistic, incredibly naive. After all, what is the probability that every single use case, addressing trust at scale that is funded, developed and productized by intelligent entrepreneurs all fail to create value? This calculation is a simple exercise in statistics, not economics.
Bitcoin is certainly almost impossible to accurately value today. It requires, among other things, estimating both the likelihood of success and the value created across all of these potential use cases. And, of course, there are likely many more “killer apps” being discussed in private circles that we’re simply unaware of. While we might debate the precision of any suggested valuation, it should be obvious that there is a value
. Like the Internet, Bitcoin's design and global reach provide incredible, lasting incentive to pursue and commercializing these ideas. And Bitcoin's egalitarian nature, like the Internet, provides the same opportunity and freedom to innovate across all participants.
It should be clear, though, that Bitcoin touches on a remarkably fundamental and important aspect of human engagement (trust
); it is not merely "digital cash", any more than the Internet is merely static text and hyperlinks. It is far more fundamental and abstract.
By Paul Krugman. Opinion Columnist. July 31, 2018; The bitcoin logo on display at the Consensus 2018 blockchain technology conference in New York in May. Bitcoin (BTC)–Bitcoin is again in the headlines being criticized by a Nobel Prize winning economist. Paul Krugman, one of the most accoladed and celebrated economists of our time, has again written in his contribution to The New York Times that Bitcoin fails to constitute money, but could also be responsible for erasing much of the monetary innovation created over the last three centuries. Bitcoin is Paul Krugman’s monster, and despite having swung at it repeatedly over the years, he’s yet to strike a meaningful blow. In an op-ed published in the NYT today, Bitcoin is often dismissed as "volatile," and Krugman repeated this criticism. Yet bitcoin's volatility pales in comparison to nations in monetary distress and is therefore very attractive in Bitcoin Is A Bubble To be sure, this is not the first time that Krugman has come out against bitcoin. Back in December, when bitcoin prices were shooting to record highs, Krugman said that the
Money, Krugman argues, is "a lubricant" that facilitates transactions, so the entire history of money has been about making it as invisible and frictionless and moving it into the background as ... This "Let's Settle This" debate (hosted by Versus by KIO Networks) between a16z crypto general partner Katie Haun and Nobel Prize-winning economist Paul Krugman took place in front of bankers ... The Super Mario Effect - Tricking Your Brain into Learning More Mark Rober TEDxPenn - Duration: 15:09. TEDx Talks Recommended for you Paul Krugman - Bitcoins isn't backed by men with guns so why should it have any value Globalization, Technological Change, and Inequality: Jeffrey Sachs and Paul Krugman in Conversation - Duration: 1:07:00. The Graduate Center, CUNY 59,894 views