I’m reasonably certain Paul Krugman deserved his Nobel Prize in economics. It was awarded for his research into, and theories about, economic geography and international trade. I have read only summaries and commentary, so I cannot claim deep familiarity. Nevertheless, I find his theory to be cogent and to accord with the evidence. It does indeed appear that the combination of economies of scale, international trade and local transport costs are fundamental factors in determining the growth and nature of metropolitan areas as a worldwide phenomenon.
I do not doubt he’s a gifted economist who has a made useful contributions to that “dismal science.” Yet when it comes to his thoughts on cryptocurrency, he appears to be an out-and-out Luddite, desperate to destroy the digital machinery dares to challenge outdated and poorly managed national currencies.
Recent Krugman Proclamations
In case you’re unfamiliar with Krugman’s Bitcoin comments, here are two recent examples:
“So Bitcoin just lost half its value. Where does it now stand relative to fundamentals? Hard to say, because there aren’t any fundamentals. More than ever, this looks like a pure bubble.” Twitter 1/17/18
“It’s got this mystique about it, because it’s some fancy technological thing that nobody really understands. There’s been no demonstration yet that it actually is helpful in conducting economic transactions. There’s no anchor for its value. You know, unlike pieces of paper with dead presidents on them, those are anchored by the fact that you can use them to pay taxes.”Interview, Business Insider 12/15/17.
Let’s dissect the second of these comments:
“It’s some fancy technological thing that nobody really understands.”
In respect of logical fallacies, this statement qualifies as the ad populum fallacy — an appeal to the prejudices of the audience. Krugman probably does not believe Bitcoin and blockchain technology to be some kind of voodoo creation. If he surfed a few cryptocurrency resources he would find coherent explanations of how blockchains work in general and how Bitcoin works in particular. While it might require a little intellectual effort, it is well within the capabilities of the average Nobel laureate. There is, perhaps, a sliver of possibility that it’s beyond his comprehension. If so, he should hush his mouth.
“There’s been no demonstration yet that it actually is helpful in conducting economic transactions.”
This is an egregious lie. Either he has not considered the evidence or he considers himself so all-knowing that consulting evidence is below his pay grade.
“There’s no anchor to its value.”
This is probably the crux of his objection to Bitcoin. He doesn’t consider it to have the qualities of a bona fide currency because he cannot identify any intrinsic quality or utility to it. And, to be fair, this accords with the first Krugman quote above which refers to Bitcoin’s volatility.
Of course, in practical terms, there are many anchors to Bitcoin’s value: the Dollar, the Euro, the Yuan, the Yen and so on. It has no intrinsic value like gold and silver, which you can use industrially or ornamentally, but neither do any national currencies. Governments make laws declaring their fiat currencies to be legal tender, but the general population only abides by such laws if the government manages the currency well. If it does not, they find alternatives.
Let’s Cut to the J.P. Morgan Chase
On September 11th 2017, Jamie Dimon the CEO of JP Morgan Chase proclaimed Bitcoin to be a fraud. “If you are stupid enough to buy it, you’ll pay the price for it one day,” he said.
If you were indeed stupid enough to buy it on the day Jamie Dimon said that, you would have paid about $4122.00 for one Bitcoin. What were you thinking, idiot!
Since his brief and courageous stand against the dastardly Bitcoin, Jamie Dimon has had a few public “come to Jesus” moments.
He didn’t have much choice really. JP Morgan Chase were already working on a blockchain project as he spoke. The company announced it a mere month later in October. According to the press release, their Interbank Information Network would “significantly reduce” the number of parties needed to verify global payments, reducing transaction times “from weeks to hours.” The Royal Bank of Canada and Australia and New Zealand Banking Group partnered in the project.
I don’t know about you, but to me that sounds suspiciously like the blockchain “actually is helpful in conducting economic transactions.” Krugman please take note.
Also please take note of Jamie Dimon’s “I regret making that comment”CNBC January 9th 2018 in reference to his much quoted “Bitcoin is a fraud.”
Paul, maybe you should practice saying “I regret making that comment.” They are words you will surely find useful in the future.
Consider, for example, your 1998 statement:
“By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.”
Surely you must have said, or at least thought, “I regret making that comment.”
The Luddite Tendency
Let’s step back from all this and put Bitcoin in context. Bitcoin is the prototype technology for currency systems that are far more efficient that existing ones. Nowadays if you buy something through the current banking system, using a check or debit or credit cards, the cost of the transaction will most likely be about 3% of the amount paid. That “banker’s cut” may be “hidden,” but it will be paid.
In general, a secure cryptocurrency transaction will clear faster, and it will do so across national boundaries, and it will cost far far less.
The cryptocurrency that eventually dominates the world may not be Bitcoin, or Ethereum or any of the current crop of contenders. We are in the early stages of a technology contest where the most efficient contender (in respect of transaction costs) will eventually dominate. That system will not preside over a fiat currency manually managed by a government, even if governments get infected by the blockchain bug. It will be a cryptocurrency that lives within a widely distributed system that no-one owns.
The poverty of Krugman’s intellectual appreciation of this is clearly evident. If you cannot get the idea of a currency system that is government-free, why would you even consider the economic importance of bullet-proof privacy, the innovative potential of smart contracts or the revolutionary impact of trustless systems. You probably wouldn’t.
You’re far more likely to call for the demise of the digital machinery that makes all of this possible.