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Friday, December 1, 2017

Stiglitz’s Ignorant Call to Ban Bitcoin

It is truly impressive how much economic nonsense this Nobel laureate managed to squeeze into a two-minute soundbite.

In a November 29th interview for Bloomberg News, Columbia economist and Nobel laureate Joseph Stiglitz gave his advice for what policymakers should do to mark the historic date where the exchange rate between bitcoins and U.S. dollars reached $10,000: “It ought to be outlawed.”

Reasonable people can disagree about whether bitcoin represents a good investment or a bubble and what sort of regulatory stance policymakers should take towards it.

Unfortunately, Stiglitz’s objections to bitcoin in the interview are hardly reasonable. In fact, it is hard to imagine a more profound display of ignorance of topics related to economics, technology, and basic morality than what Stiglitz provided in a 2-minute soundbite.

Let’s take Stiglitz’s argument apart, bit by bit.

No, Governments Don’t Create Currency

Stiglitz opens his explanation of why bitcoin should be outlawed by claiming: “One of the main functions of government is to create currency.”

The U.S. Constitution only acknowledged gold and silver as legal tender. This claim is completely inaccurate, both historically and constitutionally. As economists like Carl Menger persuasively argued, the first monies were not invented by “wise kings.” Rather, they emerged through “spontaneous order” of the market. This explains why the first monies predated any sort of government intervention. (For more on the debate over the origins of money, see this paper by William Luther and Alex Salter.)

The same can be said of the first paper monies (i.e. “currency”), which can be traced to privately-issued banknotes. As free banking scholars have noted, these privately issued forms of money provided far more reliable forms of money than their government-managed counterparts.

And if we want to place aside our elbow-padded economist jackets and instead don our lawyer suits (ew), the U.S. Constitution only acknowledged gold and silver as legal tender; nowhere does it confer to the government a monopoly privilege to issue unbacked, i.e. “fiat”, currency.

No, Bitcoin Users Aren’t All Bad Actors

Stiglitz continued: “Bitcoin is only successful because of its potential for circumvention and lack of oversight.” It’s true that the relative anonymity that bitcoin confers to its users has contributed to its success and desirability. But it is far from the only reason why people might choose to use bitcoins.

Anyone who has watched Breaking Bad or Ozark knows that cash remains by far the most popular way to conduct illicit transactions. The vast majority of bitcoin users are not hardened criminals. Many people use Bitcoin simply because it provides a cheaper, more reliable way for them to either store their wealth or transfer money anywhere in the world. This is especially true in the developing world, where sending bitcoins has become an increasingly popular way to send remittances without having to pay exorbitant transaction fees. It is also the reason why bitcoin has become such a popular alternative to government-issued money in countries like Venezuela and Zimbabwe that have experienced hyperinflation and massive financial instability.

Besides, if we are going to start banning monies that (a) confer almost total anonymity and (b) facilitate large volumes of illicit activity, mustn’t we start with what is by far the most popular form of money on the black market: the US Dollar? Anyone who has watched Breaking Bad or Ozark knows that cash remains by far the most popular way to conduct illicit transactions.

So if Stiglitz’s argument proves anything, it proves too much. We can’t just ban anything that may potentially be used for illicit activity. If that is the standard, we’d have to outlaw the not only the US dollar, but also the Internet, cell phones, and everything else under the sun.

No, Bitcoin Isn’t Socially Useless

Bitcoin is a textbook example of how all-economic value is subjective. Stiglitz’s next claim might be his most economically illiterate: “[Bitcoins] don’t serve any socially useful function.” Tell that to the millions of individuals across society who voluntarily choose to use it every day. Like it or not, bitcoin provides unique services that few other payment services can match, and the fact that millions of people demonstrate their preference for using bitcoin over alternative assets is the very definition of why it performs a “socially useful function.” And the fact that people are willing to pay $10,000 for a bitcoin is a pretty damn strong piece of evidence that it provides some useful services to them in their mind.

Later, Stiglitz wholeheartedly agrees with the interviewer’s suggestion that “[Bitcoin] is relying on the Marxist theory of value,” (by which he means the classical labor theory of value that Marx utilized in Das Kapital).

It’s hard to know where to begin deconstructing this claim. Bitcoin is a textbook example of how all economic value is subjective. It has no physical manifestation, no commodity backing it. And its value is clearly not determined by the amount of time and energy laborers put into “mining” it (especially considering most of this “mining” is done by high-powered computers, whom are presumably being exploited by their owners and should revolt, but let’s not give them any Terminator-related ideas). It is determined by people’s willingness to pay for it, which is in turn determined by their subjective evaluation of its value to them. And that, in a nutshell, is the essence of the “marginalist-subjectivist” revolution that overturned the labor theory of value.

The value of any type of money is based on expectations of its value in the future. No, Bitcoin Isn’t a Con

Along this vein, Stiglitz continues: “It’s smoke and mirrors…the value of bitcoin today is based on expectations of its value tomorrow.” At least Stiglitz gets something right in the latter half of this statement. But yet again, his argument proves too much.

The value of any type of money (or any asset, really) is based on expectations of its value in the future. This is especially true of any and all fiat monies, which have no baseline commodity value. So if bitcoin is all “smoke and mirrors,” I suppose every major government currency is too?

No, Stiglitz Isn’t an Idiot

Stiglitz rounds out his Economic Ignorance in One Lesson lecture with a few more gems: “This is just a bubble,” “we ought to just go back to what we’ve always had,” and “let’s move away from paper into the 21st century.”

To be clear, contrary to the evidence presented in this interview, Joseph Stiglitz is not stupid. Bitcoin may very well be a “bubble” (whatever that term means). But that bold prognostication is pretty rich coming from someone who failed to detect the housing bubble, dot-com bubble, and every other “bubble” over the course of his academic career. If Stiglitz was so good at detecting bubbles ex ante, his tenure as the Chairman of the Council of Economic Advisors presumably wouldn’t have helped inflate both the dot-com bubble or the housing bubble, and he would’ve invested in bitcoins way back in 2008 and be selling them off now for billions of dollars.

And the last two quoted statements, aside from being completely contradictory, are equally silly. How, pray tell, does banning bitcoin – the world’s first and most successful digital currency – accomplish the goal of “moving away from paper into the 21st century?” Get with the times, Joe.

To be clear, contrary to the evidence presented in this interview, Joseph Stiglitz is not stupid. In fact, many argue that he might be one of the brightest scholars of the 20th-21st century. But raw intelligence is no substitute for bad economics. If policymakers are foolish enough to take his advice and “outlaw” bitcoin, the result will be just as counterproductive as every other government foray into prohibition, be it alcohol prohibition or the modern war on drugs.

  • Scott Burns is an assistant professor of economics at Ursinus College in Philadelphia, Pennsylvania. He graduated with his PhD in economics from George Mason University in 2017. He is a fellow for the AIER Sound Money Project.