This article points out that the value of bitcoin and cryptocurrency was explained early on solely through Austrian economics, I have used such theory to accurately predict the value of bitcoin ten years ahead of time, and yet I see Austrians like Steve Horowitz and quasi-Austrians like George Selgin arguing against crypto instead of claiming their victory.
I. The Austrian School as a Negative School
In social settings, Austrians frequently speculate on reasons their school would be considered only the third greatest these days, after the Chicago and Keynesian schools, despite all of the obvious flaws in Keynesianism. Bryan Caplan would suggest that the Chicago school has already absorbed that which the Austrians have to offer. There is substantial truth there, and yet I still think the Austrians offer some interesting insights:
- Unique perspectives on money
- Yes, the neoclassical synthesis has absorbed this, and it is merely unique in emphasis today.
- Unique perspectives on entrepreneurship
- No, the neoclassical school has not absorbed the Austrian perspective here imo, and also the Austrian perspective itself has not matured.
- The Kirznerian entrepreneur possesses the property of alertness, but many Austrians treat this as a binary property: An individual is either alert or they are not. How do we know? Because they act, revealing that they were alert to an opportunity.
- I say, embrace the psychology and empirical reality of alertness as curiosity, perceptiveness, and other individual properties. Don’t just retroactively assign a boolean property. Go out there and measure the fact that some people are more alert, then predict that they will be better entrepreneurs.
- Unique perspectives on modeling
- Basically, there are Austrian-theoretic reasons that this school should be obsessed with microeconomic and agent-based models, and yet it isn’t.
- Perhaps the talented mathematicians and programmers are busy selecting into the more popular Chicago or Keynesian schools.
- I’ve also suggested an axiomatic statistical approach elsewhere on this blog; ordinal logic can yield certain mathematical models. I don’t see Austrians pursuing this either.
- Credit to Rothbard for trying a new approach – the whole revealed preference thing – but I think it’s a bit of a failed project at the moment unless someone can figure out how to breathe life back into it.
In my view, a significant problem is the inability of Austrians to own their victories. Ron Paul and Peter Schiff were among the famous few to predict the Great Recession using the tools of Austrian analysis. Let’s remember these wins and grow them, fighting the urge that comes from I don’t know where to become an anti-empirical school that focuses on axiom and history, publishing mainly tired critiques instead of positive contributions.
Finally, I find it ironic that many of the greatest models of the Austrians are macroeconomic models, when the school is also chiefly negative on macroeconomics per se. I encourage the school to take up microeconomics including both agent based modelling and even pragmatic regression. The neoclassicals are willing to take your contributions, why don’t you follow Hayek and take theirs as well?
My advice? Make more positive contributions, and enable your own to make such positive contributions by a reduction in trivial technical critiques. Enable statistical modelling and agent based modelling. Tolerate some imprecision. Embrace both axiomatic and empirical analysis. Embrace the psychological synthesis.
II. Cryptocurrency as Digital Money
I previously forecasted the price of bitcoin by modeling it as gold. I modeled it as such on the basis of the Austrian school and the non-policy monetary perspective in Menger’s origin of money, which stands in contrast to other perspectives about money as a government-issued entity.
Now, any historian of money, Selgin included, would know that gold has often been used as money, and yet I suspect he would slip his way out of saying that gold is money today. This is contra Menger, who Selgin would invoke to explain the value of money. I use Menger’s analysis because I saw BTC doing exactly what was done with gold:
- Held (store of value)
- Exchanged (yes, at first as a niche medium of exchange, exactly as Clayton Christensen would predict for any innovation. Specifically, for moving money across borders and avoiding large, traced, withdrawals and transfers)
- As a unit of account – specifically to account for the degree of true inflation in national fiats like the USD and hedge against their printing.
So crypto meets the classic threefold test of money, but also obtains competitive advantages:
- Harder to counterfeit
- Easier transport
- For some cryptos, some other things provide value in certain situations
- Fast transfer
- Smart contracts
These features often allow fundamental comparative crypto analysis too. As an aside, asset traders often refer to feature-level value estimates as objective. The idea is that the feature itself has value independent of individual preference. This relates both to the price-taking nature of goods on markets and also deeply to a sort of pseudo-moral claim that goods should or will be used in their highest value capacity. Selgin and Horowitz decry the objective value claim, but I consider myself a compatibilist and I think that value is certainly subjective but also highly objective for the aforementioned reasons. My preferences do little to sway the price tag at Walmart, and feature transfer often practically moves with predictable, and effectively if not actually, objective value, cost, and price factors.
III. The Moving Goalpost of General Acceptability
So here’s a thread from Selgin where he sums up why he doesn’t think bitcoin will ever become money. I’m utterly baffled by this because I see bitcoin as already having become money. I’ve followed up with him and as far as I can tell the issue comes down to quibbling about what ‘general acceptability’ is and insisting that for something to be money means that it is generally accepted. Menger and I certainly don’t believe “You are the reserve currency or you are not money.”
In the first place, niche monies exist. Cigarettes are generally traded within certain prisons in lieu of barter. That is, they are Mengerian money in a local context. Small countries have monies that are only used over that limited region. Shell monies are only used in a few conspicuous places. Menger and I would consider all of these to be money because “general acceptability” doesn’t mean “almost everyone uses it.” Instead, it means “it is reliably useable as a substitute for barter.”
So anyway, I say bitcoin is already a money, it is clearly not the world reserve currency, you might call it a niche money but the level of niche is decreasing over time, and there is already a substantial socio-economic network around it that shares value with it. Economists who recognize this are cool and those who don’t are not cool. Austrians can be cool if they argue, I think correctly, that their theory of money uniquely explains the rise of bitcoin. Austrians aren’t cool to the extent that they post memes on Facebook about winning boxing matches with “bitcoiners”.
I should be clear that Selgin and Horowitz are hardly a representation of the broader Austrian crowd. Joe Salerno leads in a very different clique of Hayekians that embraces the dehomoginization theory of Austrian School.