[Dave Birch] The Nobel prize-winning economist Paul Krugman mentioned Bitcoin in his blog over at the New York Times, prompting the all-too-familiar religious-style flame wars in the comments that followed. The reason for this is that he said (about Bitcoin) that

One thing I haven’t seen emphasized, however, is the extent to which the whole concept of having to “mine” Bitcoins by expending real resources amounts to a drastic retrogression

[From Adam Smith Hates Bitcoin – NYTimes.com]

As several commenters pointed out, the work that goes into the mining is really the work that needs to be done to maintain the transaction ledgers, the “blockchain”, and this will continue even after all of the bitcoins have been mined and this work will have to be paid for in transaction fees if it is no longer rewarded in bitcoins. But that’s by the by. In the piece, Krugman quotes Adam Smith, who very famously said (in “An Inquiry into the Nature and Causes of the Weatlh of Nations“) that

The gold and silver money which circulates in any country may very properly be compared to a highway, which, while it circulates and carries to market all the grass and corn of the country produces itself not a single pile either.

I’m partial to the money as highway metaphor. This has stability as an essential component: you know where roads are and where they go. You can rely on them and you can build facilities around them. I have in front of me an article from Discover magazine from 1998 (“The Fiscal Frontier” in the October issue) in which Mr. Krugman, while Professor of Economics at MIT, said with remarkable prescience that

One can imagine that a system of purely virtual money might be subject to severe instabilty.

He goes to make two well-informed and sound comments about the future of electronic money that I think are wrong (as if he cares, I can hear you thinking…). He says that

  1. There will be a distinction between electronic cash and electronic money because of the need for small transactions where neither the buyer nor seller want the buyer’s creditworthiness to be an issue. I used to think that this was true, but I don’t any more. For the reasons discussed before, specifically the falling costs of computers and communications, the connection between the transactional environment and the social graph, transactions will be between identities and their credentials and reputation obviate the need to avoid trust by assaying the medium of exchange.
  2. What everyone wants is an anonymous, reliable means of exchange; given a chance, they will always prefer one backed by a government. It’s not at all clear to me that “everyone” wants an anonymous means of exchange, and nor is it clear that — even if they would prefer a store of value backed by a government — they care whether the means of exchange is backed by the government or not.

By the way, he also made a prediction that I strongly agree with. He said that

There will not be a universal currency for a long time. There is a big advantage to separate currencies providing price stability in different parts of the world.

How true. This is just the kind of point made in the discussions around the Long Finance report on finance in 2050, where the notion of community is extended to both mundane and virtual groups, each of which might prefer its own currency, thus providing stability within the community. There won’t be a single world currency (whether the Dollar or the Remibi) and there won’t be a single virtual currency (whether Bitcoin or MintChip). There will be lots of currencies and we will all be better off because of it.

These are personal opinions and should not be misunderstood as representing the opinions of 
Consult Hyperion or any of its clients or suppliers

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