Last month I wrote about Hayek’s and Rothbard’s conflicting monetary ideals. Much of the difference between their visions can be chalked up to differing predictions, but Rothbard’s prescription involves one important proviso that Hayek’s does not – namely, the institutionalization of the 100%-reserve warehouse receipt model of money.
It was the failure of Rothbard to distinguish between prediction and prescription in Hayek’s work that led him to reject Hayek’s predictions on what free-market money could look like.1 It is this important distinction which lets us imagine the reactions of the two men to a very new monetary development – Bitcoin – even though it looks nothing like either of their predictions.
First, let’s look at the main schools of Austrian thought as to what free-market money would look like:
- Rothbard: 100% reserve specie-backed money issued by banks, which leads to continuously falling prices.
- Selgin: Fractional reserve specie-backed money in a competitive free-banking economy.
- Hayek: Competitive token money based on a “market basket”, with the goal of general price stability.
All of the analysis that then follows is only ever conditionally valid – that is, if these particular monetary arrangements come to pass
There are, of course, pretty safe predictive bets, which the theories have in common. A central bank could not exist in a free market. Without legal tender laws, there will be some degree of competition among currencies. And all of the theories involve banks issuing currency. Pretty solid assumption, right? How else could it be done?
Enter Bitcoin. Bitcoin is issued by no bank – made possible by advances in peer to peer networking. It is completely decentralized. It is not backed by hard specie, and yet it is noninflationary – made possible by advances in cryptography applied on several levels. It is nearly impossible to create illegitimate coins (though “mining” is possible by hashing values, but the electricity costs make it generally not worth the investment), and the possibility of fraudulent transactions decreases with the number of people connected to the network.2 That is, as the value of the Bitcoin goes up, the possibility of fraud should diminish.
The technology which allows Bitcoin to exist is very new. And since computational cryptography and monetary economics haven’t typically had much to do with one another, it wouldn’t be very fair to fault any mid-century economist for failing to predict its possibility.
Bitcoin should demonstrate then that monetary arrangement is a technical problem – not something which can be deduced a priori. We can say certain things about certain types of money a priori, but the economist can no more talk about the absolute “best” type of money than he can about the “best” type of computer chip. An iMac is obviously a better computer than ENIAC, but it would be foolish to rule out further innovation in the field for this fact. And of course, a state monopoly is no better at solving technical monetary problems than it is at solving technical industrial problems. Things can plod along passably well (as economies have done since the rise of central banking), but it’s still no substitute for market innovation and competition.
The fundamental difference between Hayek and Rothbard then, is that Hayek believed money to be a technical problem, best solved by the market, where Rothbard believed it to be an institutional problem, best solved by an economist. This is why the vagueness of Hayek’s predictions and their allowance for human discretion in regulating monies seemed distasteful to Rothbard. And this is why, even though it comports with neither of their predictions, Hayek would welcome Bitcoin into the market, where Rothbard would scorn it.
In fact, Bitcoin takes the denationalisation of money a step further than Hayek did. Where Hayek’s system requires government to remove legal tender laws and Rothbard’s requires governments to return to the gold standard, cryptocurrencies like Bitcoin have no such political prerequisites. There is no bank to shut down, no specie to seize (the downfall of the ill-fated Liberty Dollar) – nothing at all for governments to aim at, except individual users. And as the war on internet piracy should demonstrate, such a campaign cannot be other than costly and ineffective.
In short, if we believe the recurrence of inflationary cycles is a problem too urgent to leave to the political process, Bitcoin could be our best bet in the fight to divest government of its monetary monopoly.
- Rothbard, Murray. “The Case for a Genuine Gold Dollar” (1985). In The Gold Standard: Perspectives in the Austrian School (1992): “It would have to be imposed (to use a derogatory term from Hayek himself) as a ‘constructivist’ scheme from the top, from government to be inflicted upon the market.”
- See the Bitcoin whitepaper by Satoshi Nakamoto, especially section 11.