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"We're not getting a lot of economists writing on Bitcoin"

Economists have written on the mechanics of a Bitcoin-like currency, in essence, a fixed-supply alternative anonymous fiat "currency". The conclusion is that it will not be fulfilling its anarchist ideological aspirations by unseating the dollar. But it may have a place as an electronic equivalent of cash with appeal for illicit (read: extra-state) transactions.

My dismay with the Bitcoin discussion, as an economist, has been the level of confidence everyone comes with. Whether it is dismissing the last century of economics off-hand or arguing one position in a rich debate with dogmatic passion, it is difficult to have an informed conversation. This comes from both sides, e.g. deflation is good for a currency versus deflation causes a deflationary spiral, both highly contentious statements at best, comes up in every HN bitcoin discussion.

"Economists have written on the mechanics of a Bitcoin-like currency, in essence, a fixed-supply alternative anonymous fiat "currency"."

You need to go back to papers written by F.A Hayek criticizing Keynes in the 30s to get any serious academic discussion of the benefits of a fixed money supply. His critique of Keynes' idea of the "Paradox of Savings" is good, also the later paper he wrote: "The Denationalization of Money", which explores privately issued competing currencies is pretty interesting.

Hayek later changed his mind on monetary policy, denounced some of his old views, and endorsed inflation targeting, so that's not a very good example.

He published Denationalization of Money when he was 77 years old.

Funny thing about Hayek. If you read "Monetary Theory and the Trade Cycle" (http://mises.org/daily/3121) he describes the dynamics of the boom/bust cycle and how they are a direct result of fractional reserve banking but then says:

"If it were possible, as has been repeatedly asserted in recent English literature,[114] to keep the total amount of bank deposits entirely stable, that would constitute the only means of getting rid of cyclical fluctuations. This seems to us purely utopian. It would necessitate the complete abolition of all bank money — i.e., notes and checks — and the reduction of the banks to the role of brokers, trading in savings. But even if we assume the fundamental possibility of this state of things, it remains very questionable whether many would wish to put it into effect if they were clear about its consequences. The stability of the economic system would be obtained at the price of curbing economic progress. The rate of interest would be constantly above the level maintained under the existing system (for, generally speaking, even in times of depression some extension of credit takes place).[115] The utilization of new inventions and the "realization of new combinations" would be made more difficult, and thus there would disappear a psychological incentive towards progress, whose importance cannot be judged on purely economic grounds. It is no exaggeration to say that not only would it be impossible to put such a scheme into practice in the present state of economic enlightenment of the public, but even its theoretical justification would be doubtful."

He's basically apologizing for finding all these flaws in the monetary system and central banking. He was convinced, at least at this point in his life that he could reason with the financial system to resolve these issues through better understanding. That's the interesting thing about Hayek. He was not opposed to the structure of the financial system out of ideological conviction but just that he had enormous insight into the dynamics of the system and stated his understanding without editing or simply repeating the conventional wisdom.

F.A. Hayek versus J.M. Keynes is an Einstein versus Quantum Mechanics moment for economics. There is a tremendous amount of richness that is lost from just reading them without any context. Neither "won" - both theories saw their halcyon days and both have been incorporated into the modern dialectic.

Note that a lot of Bitcoin enthusiasts plough through Keynes to the value of debt. This, on the other hand, was answered by the Battle of Waterloo, where the City of London financed British army beat the initially superior French.

Are you saying that the good thing about fiat currency is that the gov't can use it to finance a war? Because that's one of my main complaints about fiat currency.

Whatever you pay your taxes in will be used to finance a war.

For your statement to be true, I would have expected a big rise in my taxes over the last decade, and perhaps a corresponding contraction of other gov't spending. I've seen neither, nor do I think the gov't was hoarding a big war-chest of funds for such an occasion. The main point of my comment was to point out that when it's possible for the gov't to finance war(s) with deficit spending as opposed to war-bonds, people freely ignore it, as you've demonstrated.

  We're not getting a lot of economists writing on Bitcoin.

What's the track record of economists vs. computer scientists over the past ten years (or twenty, or fifty)? You don't have liberal sorting algorithms and conservative ones, but you do have liberal and conservative economic theories. This indicates that economics, especially macroeconomics, is more like opinion journalism than science. We need empirical tests. Bitcoin provides one.

Postscript:

Computer science has delivered the goods in a way that economics just hasn't, as even Krugman admits[1]:

  ...the widely accepted proposition that events like those 
  of the 1930s could never happen again. But even pessimists 
  like me, even those who realized that the age of bank runs 
  and liquidity traps was not yet over, failed to realize how 
  bad a crisis was waiting to happen... 

  What you can criticize economists for – and indeed, what I 
  sometimes berate myself for – is failing even to see that 
  something like this crisis was a fairly likely event.

Why weren't they able to see this was a likely event? Well, rewind a bit and witness Bernanke writing in 2004 about the "Great Moderation" [2], the ostensible "decline in macroeconomic volatility":

  My view is that improvements in monetary policy, though 
  certainly not the only factor, have probably been an 
  important source of the Great Moderation. In particular, I 
  am not convinced that the decline in macroeconomic 
  volatility of the past two decades was primarily the result 
  of good luck, as some have argued, though I am sure good 
  luck had its part to play as well.

In other words, Bernanke thought the (nonexistent) Great Moderation was the result of improvements in monetary policy. Thereby approving of the monetary policy that inflated the housing bubble, while blithely unaware of the catastrophe that was to unfold. Conclusion: economists aren't so good at predicting economic events or structuring economic systems. Ben thought the system he'd helped build wouldn't fall down. It did. Time for some new ideas, from people who actually do build systems that don't fall down: computer scientists.

[1] http://krugman.blogs.nytimes.com/2012/03/05/economics-in-the...

[2] http://www.federalreserve.gov/boarddocs/speeches/2004/200402...

What's the track record of economists vs. computer scientists over the past ten years?

Compare y2k to 2008 banking crisis?

Y2K: nothing bad happened after the intervention of computer scientists.

2008 banking crisis: terrible things happened even with (or because of) the intervention of economists.

Compare the damage done by each? Computer scientists come out waaaaaaaaaay ahead on that one.

"you have liberal and conservative economic theories"

We have politicians who have misunderstand and politicise economics. Similar to how evolution is somehow now a liberal theory.

New Keynesian economics is not liberal or conservative. It says, in hyper-simplified form, save (conservative) in good times, and spend (liberal) in bad. Right-wing Central Europe is one of the few in recent memory to have implemented both legs. Politically conservative trade theory, about which there is consensus amongst economists, earned left-wing Paul Krugman his Nobel Prize.

Myth of the Rational Voter [1] explores issues economists have put to rest but the public refuses to accept there is consensus on. Similar to how the masses insist on perceiving "hackers".

[1] http://www.amazon.com/Myth-Rational-Voter-Democracies-Polici...

That's great about what Keynesian economics says to do. But there haven't been controlled experiments in which thousands of different countries ran economies with different characteristics and parameters. With virtual economies and digital currencies, followed by seasteading, we can finally get that. And something tells me "Keynesianism" (which primarily serves as a bastardized justification for slow wealth seizures via inflation and fast wealth seizures like Cyprus) won't be doing so well when the numbers are toted up.

This will never happen. The combinatorics blow up exponentially.

Besides, your comment basically says that you don't have data to support your position, but you have a hunch, so we should just trust you on this.

I do have data to support my position. North Korea vs. South Korea, East Germany vs. West Germany, Maoist China vs. Taiwan/HK/Singapore. Leftism produces poverty, capitalism produces wealth. Communism doesn't work. That's a macro result you can hang your hat on. Millions died, one would hope the point is proved.

Now today the question is whether the "mixed economy" which allows unlimited state intervention (which does indeed lead to Cyprus) is better than fettered government and unfettered capitalism. We're going to find out.

You're being ridiculous. Keynes was not advocating for the modern North Korean State, or any form of communism for that matter.

Please don't destroy discussions.

The Cypriot wealth seizure (attempting to cut a budget deficit in recession with a very destructive tax because they'd already ceded control over monetary expansion to an entity that isn't interested in doing it) is just about the polar opposite of Keynesianism ...

As for seasteading, there have been plenty of experiments testing the theory that a tiny nation can become very rich from being a laxly-regulated, tax-free place for rich foreigners to park money. It works very well until you try to generalise the results to larger economies and end up like a certain Mediterranean tax haven with a non-state currency...

The trouble with dismissing the knowledge accumulated by those whose experiments failed is the risk of being condemned to repeat them...

This is nonsense. "Time for some new ideas, from people who actually grow complex organic systems: animal trainers." "Time for some new ideas, from people who actually keep large masses of people happy: sex workers." "Time for some new ideas, from people who actually clean up others' problems: garbage men." What your argument is missing is that even if top economists aren't great at economics, they might still be better at it than computer scientists. Maybe top economists are bad at economics because economics is hard. Not because only idiots do economics.

Computer scientists have proven themselves capable of going into completely unrelated areas (advertising, video, audio, hotels, taxis, airplanes, and most notably payments) and completely disrupting the status quo of the "experts".

And those experts were at least operating profitable legacy businesses, so had _some_ empirical proof of their claims (to wit: their products worked, even if not as well as the Valley's).

Now, lo and behold, we have a direct test of open source software vs. Krugmanesque proclamations. Krugman is simply not qualified to evaluate Bitcoin. You think he knows SHA-256 from a hole in the ground? He'll say it won't work just like legacy payment providers thought Paypal wouldn't work. And then he'll start advocating that it be prosecuted once it does threaten him, and then he will lose.

You are exhibiting a selective memory that only remembers the successes. Investors in the late 90s pumped money into "computer scientists" only to find that just because something is being done on the Internet doesn't make it automatically profitable. You look at Bitcoin and think it is so obviously Amazon.com, but it could just as easily be Pets.com.

The same way studying entrepreneurship doesn't make you an entrepreneur, studying economics doesn't make you an economist.

If someone can reliably predict macroeconomic trends and manage risk, what's their excuse for not being filthy rich? If they're not rich, I don't trust their tallent. If they are rich, I trust they won't give away their secret formula.

This is an absurd conclusion. Computer science concerns itself with closed systems with known and predictable behavior. Economics must deal with the the human brain with all of its wants and needs, and the interaction of all of the people and resources on the earth. We can't even begin to understand the brain in the same way we understand a CPU. We can absolutely control the inputs and outputs of computational processes. The real world is messy and orders of magnitude more complex.

Except mainstream economics doesn't do that. It makes dramatically unrealistic and sometimes contradictory simplifying assumptions. For details see Steve Keen's Debunking Economics.

Economics concerns subject matter that is far too complex to analyze without making simplifying assumptions. If you want to argue that they make the wrong simplifying assumptions, fine, but what evidence do you have that Computer Scientists are going to do a better job of it just because they have proved the asymptotic bounds of sorting algorithms?

I made no claims about computer scientists. Keen argues that the assumptions made by mainstream economics are in fact terribly wrong.

He also suggests that people outside the field are making better contributions, but I haven't gotten to the part in the book where he argues that in detail.

Are you asserting that computer scientists know more about economics, and particularly currency systems, than economists?

So you're saying that computer scientists are inherently more likely to be correct about an economic proposition than economists? Could it be that the field of computer science is more amenable to provably correct statements than the field of economics?

I'd say that computer science has shown similar failures when dealing with phenomena that are as large-scale and chaotic as economics. Artificial intelligence is one such area in which it has been difficult to produce results.

Using the word "system" as broadly as you have in this post seems like a recipe for shaky reasoning.

>As Paul Krugman indicates, Bitcoin is actually a pretty bad currency. It's difficult to convert to, few places accept it as currency

I'm not sure this is a fair criticism because literally every non-governmental currency would suffer from this problem at first. There is nothing inherent to bitcoin that precludes it being easy to convert to or being widely accepted. In fact, there are qualities inherent to bitcoin that make it easy to convert to and to be widely accepted. The problem is that there is no appropriate frame of reference for these qualities because there have been so few digital currencies in the history of the world.

A fairer assessment might be that bitcoin is a fairly bad currency at the moment but has the potential to be a pretty great currency. The same is not true for the Zimbabwean dollar.

I agree, however, that currency speculation is currently the biggest problem facing bitcoin (by far).

I'm not sure this is a fair criticism because literally every non-governmental currency would suffer from this problem at first.

There's no such thing as fair criticism here. If it's a valid critique that any non-governmental currency would share then chalk up a win for governmental currencies.

Real world currencies are valued solely on the desire to have them; GDP and credit worthiness only play a role because they affect people's perception of how stable or valuable a currency is. There is nothing tangible tying the dollar to the US GDP, if everyone decided the dollar was worthless it would be.

The main thing is that since hundreds of millions of people use the USD and you can use it to buy many goods and services, it's difficult to sway the opinions of a large chunk of the population that use it so any change in value will be slow. Bitcoin on the other hand has a much smaller user base so its volatility is much larger.

No, real world currencies are based on the fact that the issuing government accepts it as payment of debts to that government. The fundamental base of the US dollar is that the taxes you owe the US must be paid in US dollars. The rest of its value extends out transitively from there. But it is not baseless, it is built on the fact that if you do not give the US government the dollars it thinks it deserves, it will come and put you in jail.

If this ceases to be a credible threat, it's actually quite amazing to me how quickly a government's currency can become nothing but so much paper, which argues strongly against the idea that the value is arbitrary.

Yes, that's my frustration as well. What's worse is that the articles that are economics focused are clearly written by non-economists. They all seem to be very close to crackpot conspiracies about the global banking system and how fiat currencies are inherently bad.

From my non-economist understanding, the biggest difference between BTC and modern fiat currencies is that the money supply in the latter is endogenous. That is, when a bank makes a loan, the amount of money in the system actually increases. When the loan is paid back, the amount of money in the system decreases again.

This means that the amount of money can fluctuate to accomodate demand at a fixed interest rate, and it does so automatically, in a decentralized way, as part of the regular operation of the system, without any government intervention. This is why it is called endogenous.

Now, there are the goldbugs who think a fixed money supply is somehow morally superior. But my understanding is that experiments with controlling the money supply exogenously in the past, i.e. where the central bank set a fixed size of the money supply as target and tried to enforce that, resulted in a wildly volatile interest rate - simply because the demand for money is volatile, and by fixing the size of the money supply, something else had to budge.

For businesses, a volatile interest rate is bad because it makes planning difficult. This is why central banks now target a fixed interest rate (with volatile, endogenous money supply) - it simply is better for the economy.

Aside from the crazy waste of energy, this is probably the most important argument against basing the economy on Bitcoin.

Real-world currencies are valued on the GDP and credit-worthiness of the nations that issue the currency.

Right, but ultimately thats just a confidence judgement. The 'credit worthniess of a nation' is just a consensus judgement by the markets. Hence Money is based on confidence and consensus. With most currencies that fact is hidden away, but with Bitcoin its just made more explicit.

USD is a confidence judgement of many things which are not the literal note. Bitcoin is just the confidence in Bitcoin. Of which I have none.

I'm pretty sure the US govt is here to stay, though.

Bitcoin is just a distributed ledger which keeps track of which coins are associated with which wallets, where "coin" and "wallet" are nothing more than unique ID numbers. Do you lack confidence that this system actually works, or when you say "confidence in Bitcoin" are you actually referring to some other system built around it?

right, the USD has some institutions and a very large community (i.e. a nation) behind it, and they're huge so its not really an easy comparison with Bitcoin. But Bitcoin is not 'just bitcoin', it also has institutions and a community, they're just much smaller at the moment.