This article is the second, and final, installment in our two part series on Bitcoin in the mainstream. This series looks at how far the mainstream is lagging behind the Bitcoin community in terms of their knowledge about cryptocurrency and monetary theory. In the first installment, we underwent an in-depth analysis of a recent research paper on Bitcoin price movement conducted by ETH Zürich, a leading technology university in Switzerland. The paper detailed an empirical study done by the research team on movements in the Bitcoin price and how they correlated with changes in social awareness of the digital currency. In our previous article, we proved how the paper ultimately failed to provide anything of value to the ongoing, economic discussions regarding Bitcoin. We concluded that the results of the study provided extremely outdated information—the Bitcoin community has known about the connection between social awareness and prices for years. Additionally, we identified many economic fallacies used by the researchers and we explained why the use of those fallacies served to discredit the study even further.
In this article, we will be taking a much more general approach to our examination of where the mainstream stands on Bitcoin. We will briefly return to the Swiss paper in the first section of this article, for a statement made in the paper is relevant to economics in general and must be addressed in order to gain a thorough understanding of how the mainstream perceives both Bitcoin and economics. Then, we will broaden our scope slightly, leaving our specific analysis of the Swiss study, and look at what kind of discussion is taking place in mainstream economic circles. We will then broaden our focus even more and explore the position of the layman, the average person, on Bitcoin. Lastly, we will identify goals that must be accomplished in order to achieve mass Bitcoin adoption.
The Importance of Social Interaction in the Bitcoin Economy and the Economy in General: A False Dichotomy Between Markets and Government
In the Bitcoin research paper written by the team from ETH Zürich, the researchers made a statement that highlighted a shining example of economic ignorance. The Swiss team stated on two different occasions in their paper that the decentralized nature of Bitcoin made the market interactions within its peer-to-peer ecosystem rely only upon the behavior of individuals actors. In other words, Bitcoin’s decentralized payment network makes the Bitcoin economy run solely on human action—individuals acting in their own self interest.
Bitcoin’s decentralized structure, based on the contribution of its users ratherthan a central authority, implies that the dynamics of its economy may be strongly driven by social factors, which are composed of interactions between the actors of the market.
Owing to the decentralized character of the Bitcoin currency, the dynamics of its economy largely depend on the behaviour of its users, who (i) mine new bitcoins and maintain the block chain and (ii) influence the exchange rate by trading bitcoins to and from other currencies; these interactions between users form the social backbone of Bitcoin.
Note that the emphasis was added by this author, and did not appear in the original text.
This decentralized economy is apparently the opposite of a centralized one, where individual interactions are monitored and refereed by a single, regulatory body (ie. Governments). Since there is no central authority in the Bitcoin economy, according to the researchers, the entire economy rests upon social interactions between individuals. Although they did not state it explicitly, this dichotomy between decentralized and centralized economic systems indicates that the researchers are implying that centralized economies operate based on something other than human action and social cooperation. So, what is this alternative to human action that powers centralized economies? Does centralization turn actors on the market into automatons, unmotivated and devoid of free will? If this is true, then it means that there exists an economic dividing-line between the decentralized, Bitcoin economy and the centralized, government economy. Only those who participate in the Bitcoin economy are truly human; the decentralized nature of this market allows human action and social interaction to dictate the economic forces at play. The rest—those who have never used any cryptocurrency—are not really economic actors, only cogs in a monopolistic machine.
One could argue that this author’s identified implications, stated above, of such a dichotomy as the one subtly implied in the Swiss paper are far too extreme. The researchers were merely saying that the only thing in the Bitcoin economy that drives activity are the interactions between individuals. In an economy that is regulated by a central body, there are government decrees and central banking policies (ie. Money creation and manipulated interest rates) that steer the economy without the voluntary agreement of the individual actors. This author would have to rebut, then, by saying that there is no such thing as economic activity absent of social interaction. Even if the interaction is involuntary, the object of some government or other monopolistic intervention, it is still social interaction, albeit a violent one. Therefore, all economies necessarily rely solely upon the social interactions between individuals. There is no fundamental, economic distinction between centralized and decentralized systems; as far as economics is concerned, all systems are centralized to a degree—from a government making laws to a single person having sole authority over his or her actions. This distinction is therefore a difference of degree and not one of kind.
There is no dichotomy between markets controlled by governments and markets controlled by no one, for even a government is only an actor on a decentralized market; it cannot operate without being accepted by the majority of the people inhabiting a geographical area. All economic activity occurs on a market that cannot, by its very nature, be completely dictated by one agency in a vacuum that is devoid of all human action. Even governments are nothing more than a handful of individuals acting in concert and imposing their collective will upon a citizenry that agrees to, and perpetuates the existence of, the State, by obeying its edicts. Thus, no human institution can exist without social collaboration between individuals. The researchers’ separation of an action-driven economy from centrally managed markets is therefore untenable and, to be frank, confusing. The implications identified above are not radical; They are the logical conclusion of such a distinction between governments and markets. If government controlled economies do not rely upon social collaboration to operate, then the actors within a centrally planned economy are not really human—since the essence of humanity is individual action and self-motivated, social cooperation.
The false dichotomy between markets and government is nothing new, our Swiss research team is far from being the first to make the mistake of creating an unrealistic distinction between governments and markets. Marxian economics, replacing the word “government” with “society,” views markets as antithetical to society. Once the proletariat overthrows the ruling class, society will eliminate all markets and bring equal material wealth to the masses.
Even Murray Rothbard, a legend of the Austrian school of economics, dangerously flirted with the idea that governments are not conducive to the existence of markets. Clouded by his belief in natural law, Rothbard associated liberty with the existence of a free market, diminished liberty with a hindered market, and slavery with the destruction of the market—which would be brought about by the establishment of socialism. Adhering to Mises’ argument on economic calculation under socialism, Rothbard posited that a completely monopolized economy would destroy the market, throwing the human race into a state of poverty and savagery.
However, the economic calculation problem would only lead to the destruction of the monetary economy, not the eradication of the market as a whole. The monetary economy is merely an offshoot of the market. It arises from the natural evolution of human action. As long as people maintain the ability to communicate and cooperate with each other, though, markets will exist. Even under the most tyrannical regime, there can still be a thriving market where people engage in mutually beneficial action—the existence of money is not necessary for economic actions to take place. And the government will only be able to control this non-monetary market as far as it can influence social cooperation.
Finally, we have identified and deconstructed the last fallacy used by the Swiss researchers in their paper. We have presented numerous and in-depth arguments against the employed methodologies, chosen theories, and conclusions made by the researchers in their paper. So, we can now leave this paper to rest and consider it fully discredited.
Unfortunately, however, even though the Swiss Bitcoin price study was horribly flawed, the paper was one of the smarter Bitcoin studies that have been conducted by mainstream economic circles. Not only are the other mainstream Bitcoin studies even more misguided than the one we have meticulously deconstructed here, they are incredibly scarce as well. We will now look at just how little attention the mainstream academic world has given Bitcoin and how wrong they have been when they have written about the cryptocoin.
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