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Cryptocurrencies as a Single Pool of Wealth: Thoughts on the Purchasing Power of Decentralized Electronic Money – Article by G. Stolyarov II

Cryptocurrencies as a Single Pool of Wealth: Thoughts on the Purchasing Power of Decentralized Electronic Money – Article by G. Stolyarov II

The New Renaissance Hat
G. Stolyarov II
January 12, 2014

The recent meteoric rise in the dollar price of Bitcoin – from around $12 at the beginning of 2013 to several peaks above $1000 at the end – has brought widespread attention to the prospects for and future of cryptocurrencies. I have no material stake in Bitcoin (although I do accept donations), and this article will not attempt to predict whether the current price of Bitcoin signifies mostly lasting value or a bubble akin to the Dutch tulip mania of the 1630s. Instead of speculation about any particular price level, I hope here to establish a principle pertaining to the purchasing power of cryptocurrencies in general, since Bitcoin is no longer the only one.

Although Bitcoin, developed in 2009 by the pseudonymous Satoshi Namakoto, has the distinction and advantage of having been the first cryptocurrency to gain widespread adoption, others, such as Litecoin (2011), Namecoin (2011), Peercoin (2012), and even Dogecoin (2013) – the first cryptocurrency based on an Internet meme – have followed suit. Many of these cryptocurrencies’ fundamental elements are similar. Litecoin’s algorithm is nearly identical to Bitcoin (with the major difference being the fourfold increase in the rate of block processing and transaction confirmation), and the Dogecoin algorithm is the same as that of Litecoin. The premise behind each cryptocurrency is a built-in deflation; the rate of production slows with time, and only 21 million Bitcoins could ever be “mined” electronically. The limit for the total pool of Litecoins is 84 million, whereas the total Dogecoins in circulation will approach an asymptote of 100 billion.

Bitcoin-coins Namecoin_Coin Dogecoin_logoLitecoin_Logo

The deflationary mechanism of each cryptocurrency is admirable; it is an attempt to preserve real purchasing power. With fiat paper money printed by an out-of-control central bank, an increase in the number and denomination of papers (or their electronic equivalents) circulating in the economy will not increase material prosperity or the abundance of real goods; it will only raise the prices of goods in terms of fiat-money quantities. Ludwig von Mises, in his 1912 Theory of Money and Credit, outlined the redistributive effects  of inflation; those who get the new money first (typically politically connected cronies and the institutions they control) will gain in real purchasing power, while those to whom the new money spreads last will lose. Cryptocurrencies are independent of any central issuer (although different organizations administer the technical protocols of each cryptocurrency) and so are not vulnerable to such redistributive inflationary pressures induced by political considerations. This is the principal advantage of cryptocurrencies over any fiat currency issued by a governmental or quasi-governmental central bank. Moreover, the real expenditure of resources (computer hardware and electricity) for mining cryptocurrencies provides a built-in scarcity that further restricts the possibility of inflation.

Yet there is another element to consider. Virtually any major cryptocurrency can be exchanged freely for any other (with some inevitable but minor transaction costs and spreads) as well as for national fiat currencies (with higher transaction costs in both time and money). For instance, on January 12, 2014, one Bitcoin could trade for approximately $850, while one Litecoin could trade for approximately $25, implying an exchange rate of 34 Litecoins per Bitcoin. Due to the similarity in the technical specifications of each cryptocurrency (similar algorithms, similar built-in scarcity, ability to be mined by the same computer hardware, and similar decentralized, distributed generation), any cryptocurrency could theoretically serve an identical function to any other. (The one caveat to this principle is that any future cryptocurrency algorithm that offers increased security from theft could crowd out the others if enough market participants come to recognize it as offering more reliable protection against hackers and fraudsters than the current Bitcoin algorithm and Bitcoin-oriented services do.)  Moreover, any individual or organization with sufficient resources and determination could initiate a new cryptocurrency, much as Billy Markus initiated Dogecoin in part with the intent to provide an amusing reaction to the Bitcoin price crash in early December 2013.

This free entry into the cryptocurrency-creation market, combined with the essential similarity of all cryptocurrencies to date and the ability to readily exchange any one for any other, suggests that we should not be considering the purchasing power of Bitcoin in isolation. Rather, we should view all cryptocurrencies combined as a single pool of wealth. The total purchasing power of this pool of cryptocurrencies in general would depend on a multitude of real factors, including the demand among the general public for an alternative to governmental fiat currencies and the ease with which cryptocurrencies facilitate otherwise cumbersome or infeasible financial transactions. In other words, the properties of cryptocurrencies as stores of value and media of exchange would ultimately determine how much they could purchase, and the activities of arbitrageurs among the cryptocurrencies would tend to produce exchange rates that mirror the relative volumes of each cryptocurrency in existence. For instance, if we make the simplifying assumption that the functional properties of Bitcoin and Litecoin are identical for the practical purposes of users, then the exchange rate between Bitcoins and Litecoins should asymptotically approach 1 Bitcoin to 4 Litecoins, since this will be the ultimate ratio of the number of units of these cryptocurrencies. Of course, at any given time, the true ratio will vary, because each cryptocurrency was initiated at a different time, each has a different amount of computer hardware devoted to mining it, and none has come close to approaching its asymptotic volume.

 What implication does this insight have for the purchasing power of Bitcoin? In a world of many cryptocurrencies and the possibility of the creation of new cryptocurrencies, a single Bitcoin will purchase less than it could have purchased in a world where Bitcoin was the only possible cryptocurrency.  The degree of this effect depends on how many cryptocurrencies are in existence. This, in turn, depends on how many new cryptocurrency models or creative tweaks to existing cryptocurrency models are originated – since it is reasonable to posit that users will have little motive to switch from a more established cryptocurrency to a completely identical but less established cryptocurrency, all other things being equal. If new cryptocurrencies are originated with greater rapidity than the increase in the real purchasing power of cryptocurrencies in total, inflation may become a problem in the cryptocurrency world. The real bulwark against cryptocurrency inflation, then, is not the theoretical upper limit on any particular cryptocurrency’s volume, but rather the practical limitations on the amount of hardware that can be devoted to mining all cryptocurrencies combined. Will the scarcity of mining effort, in spite of future exponential advances in computer processing power in accordance with Moore’s Law, sufficiently restrain the inflationary pressures arising from human creativity in the cryptocurrency arena? Only time will tell.

Meaningful and Vacuous “Privilege” – Article by G. Stolyarov II

Meaningful and Vacuous “Privilege” – Article by G. Stolyarov II

The New Renaissance Hat
G. Stolyarov II
December 3, 2013

Sanford Ikeda’s concise and insightful lists of 14 common fallacies about the free market (available in two installments from The Freeman here and here) motivate careful thought about the commonly used and misused term “privilege” and the conflations in which it can result. In discussing the second fallacy regarding the free market, that it is identical to a system where the government grants special privileges to businesses, Dr. Ikeda writes that “People sometimes define ‘privilege’ as any advantage a person or group may have over others. Certainly such advantages exist today and would exist in a free market—you may be born into a wealthy family or have superior drive and resourcefulness—but these advantages are consistent with the absence of privilege in the libertarian sense, as long as you acquired such advantages without fraud or the initiation of physical violence against the person or property of others.”

Indeed, the increasingly common usage of the term “privilege” to mean any advantage whatsoever eviscerates it of any genuine meaning it once had. This problem in today’s discourse spreads far beyond discussions of connections between businesses and governments.

Certainly, the very fact that one individual is different from another – with a different set of experiences, different physique, different knowledge, and even different standing room at any particular time – provides that individual with opportunities that the other lacks, while rendering him or her limited in ways that the other is not. Unfortunately, this trivial fact is increasingly being misconstrued in some circles to suggest vile inequities arising out of innocuous human differences. People who have not aggressed against, or even demeaned or ridiculed, anyone are increasingly being identified as “privileged” simply for belonging to broadly and crudely defined groups – be it all people of European descent, all males, or even all non-overweight people (witness the pseudo-concept of “thin privilege”) or people who are not disabled. (“Ableism” is apparently an emerging sin in the vocabulary of the increasingly militant and vitriolic collectivistic “social justice” movement – which is about neither true individual-oriented justice nor the preservation of a civilized and tolerant society.)  Such a vacuously expansive view of privilege is a tremendous insult to the true victims of coercive privilege throughout history – from slaves in all eras, to women who in prior eras were denied suffrage and property rights, to the freethinkers and forbears of liberty and reason, whose voices were too often snuffed out by the arbitrary power of absolute monarchs and theocrats in the pre-Enlightenment world.

Thomas Jefferson, an opponent of privilege in its meaningful sense, put it best when he expressed in his 1826 letter to Roger C. Weightman “the palpable truth, that the mass of mankind has not been born with saddles on their backs, nor a favored few booted and spurred, ready to ride legitimately, by the grace of god.” Jefferson was a staunch opponent of the coercive privilege that enabled some to gain artificial advantages by restricting others from pursuing life-improving courses of action. Accidents of birth, or special lobbying skills, should not, in a just system, enable a person to acquire prerogatives which could not be earned through the free, peaceful exercise of that person’s abilities. Jefferson saw the future and strength of the American republic in the hoped-for emergence of a “natural aristocracy of talent and virtue” – people who, when allowed the liberty to flourish through honest work and competition, would become role models for others solely through their examples. This natural aristocracy would not need force to maintain its prominence, because the traits of the most knowledgeable, most industrious, and most virtuous people will be emulated by any who earnestly seek to improve their own lives and who have the freedom to acquire knowledge and make their own decisions.

Yet Jefferson’s natural aristocracy would be denounced as an example of horrid “privilege” by the “social justice” types – simply due to the necessarily unequal distribution of outcomes on a free market of open and honest production, competition, and cooperation. After all, not everyone can originate the same ideas at the same time. Not everyone can take advantage of the same opportunity for entrepreneurial profit, whose attainment, as economist Israel Kirzner demonstrated in Competition and Entrepreneurship, arises out of alertness to opportunities that others have missed. Kirzner writes thatBecause the participants in [a] market are less than omniscient, there are likely to exist, at any given time, a multitude of opportunities that have not yet been taken advantage of. Sellers may have sold for prices lower than the prices which were in fact obtainable… Buyers may have bought for prices higher than the lowest prices needed to secure what they are buying…” (43). Would it be an example of unacceptable “privilege” for an alert entrepreneur to remedy such an arbitrage opportunity and thereby bring otherwise-unrealized value to consumers?

Yes, the free exercise of human abilities will produce outcomes where some people will have some advantages over some others (while, of course, leaving fully open the possibility that those very others will have their own distinct advantages, obtained through hard work, knowledge, or sheer luck). But, as long as coercion is not involved in securing and maintaining those advantages, the people endowed with them are not “booted and spurred” to ride the rest of us. As Dr. Ikeda points out, the differences among people are a source of strength harnessed by the free market: “The free market gives you an incentive to profit from associating with and learning from others who might be very different from you, who operate outside your normal social networks.” By incentivizing and facilitating these interactions, the free market encourages greater tolerance, understanding, and visible societal heterogeneity of the sort that constitutes the best safeguard against truly heinous oppressions based on collectivistic stereotypes. Instead of condemning others as being too “privileged” simply on account of innocuous differences, it is far more productive to think about how those differences can help one achieve one’s own values through honest, peaceful, and productive interaction, cooperation, and exchange.

Responses to an Inquiry on Ethics, Human Purpose, and the Future of Humanity – Article by G. Stolyarov II

Responses to an Inquiry on Ethics, Human Purpose, and the Future of Humanity – Article by G. Stolyarov II

The New Renaissance Hat
G. Stolyarov II
September 5, 2013

A recent philosophical exchange with reader Elu Sive on TRA’s “About Mr. Stolyarov” page was sufficiently interesting and constructive that I have decided to post it here for a general audience. Elu Sive raised ten points of view and requested my feedback, which I subsequently provided. Here, I will cite each of the points and my response.

Elu Sive Point 1: “There is an objective reality.”

My Response: I agree in full.

Elu Sive Point 2: “The purpose of democracy is mainly a means of fighting corruption and promoting the interests of the people as opposed to those in power. It is not a valid method to select the correct answer among alternatives and should never be used as such.”

My Response: I agree. The will of the majority does not determine truth, nor does it necessarily coincide with good policy. Moreover, most decisions should be left up to individuals to implement, so long as such implementation can be done non-coercively. Democracy is only useful in the highly limited context where conflicts of preference are unavoidable and necessarily involve some people’s preferences being overridden. For instance, if only one person can be the neighborhood sheriff, then it makes sense to put the issue to a majority vote. However, even then, the powers of the neighborhood sheriff should be highly limited to the protection of individual rights, and not their violation.

Elu Sive Point 3: “Science is the best method we have for evaluating what is true and not.”

My Response: I agree, especially when science is defined broadly to include logic and mathematics. More generally, rational inquiry based on real-world observation and logical deduction therefrom is the best method we have for evaluating what is true and not.

Elu Sive Point 4: “Our human existence is only meaningful in our social contexts, to our selves and to future generations (our existence is not meaningful in universal or spiritual fashion).”

My Response: Here I disagree. Our existence is meaningful per se and as the antecedent to all meaning and value. My video series “Life as the Basis of Morality” (see Part 1 and Part 2) explains my reasoning. I agree with Ayn Rand’s statement: “I need no warrant for being, and no word of sanction upon my being. I am the warrant and the sanction.”

Elu Sive Point 5: “We should place a greater emphasis on our social context and future generations than on our selves. We should favor altruism over self-reliance.”

My Response: Here I also disagree. While I advocate considering the future and taking a longer-term view of one’s actions, as well as considering one’s impact on the world and on others, all of this should be done to promote one’s own enlightened, rational self-interest, particularly in the continuation of one’s own life and flourishing. Each individual is, by nature, best suited to promote his own well-being. In promoting his own well-being, the individual should be concerned about the well-being of others and should seek ways to exchange values with others to promote mutual flourishing. Complete autarky is impossible and undesirable; we can gain great values and improve our lives tremendously by interacting with others. However, each individual’s moral self-reliance – in the sense of thinking for oneself, acting out of one’s own initiative, and valuing one’s own productive work and independence from subjugation to the arbitrary dictates of others – is paramount for creating a world where human flourishing is maximized to the extent possible.

Elu Sive Point 6: “What classifies as common good depends on circumstances and must be continuously re-evaluated.”

My Response: What is good for people does depend on the specific context, but it is still rooted in objective requirements of human survival and flourishing. As a simple example, there are some items that can give our bodies energy if we consume them, while there are others that would poison us. The objective requirements of human survival and flourishing depend on the laws of nature, which are universally valid, though their applicability will differ based on the context. The correct answer in a given situation is like the correct choice of tool for constructing a building; it depends on what part you are working on, with what materials, in what setting, and for what goal (in terms of the values you are trying to realize). Multiple answers will be good enough for a particular problem, but some answers are clearly superior to others in achieving human survival and flourishing. That being said, it is important to continually use one’s rational faculty to evaluate the soundness of possible approaches on a case-by-case basis.

Elu Sive Point 7: “Our social context is only meaningful in the long-term context of supporting and improving human civilization, or a possible post-human civilization.”

My Response: I agree with the goal of improving human and possibly post-human civilization (though I prefer the term “transhuman”, since I think that technological transformations will amplify and supplement our humanity, enabling us to transcend existing limitations, rather than take our humanity away). I think that human societal interactions can serve multiple valuable purposes both in the immediate term and in the long term. In the immediate term, it is certainly good that grocery stores exist in one’s vicinity to enable one to obtain food and other conveniences. The shorter-term interactions, as long as they are compatible with long-term perspectives and values, can certainly be of value as well.

Elu Sive Point 8: “The defining character of our age as judged by future civilization will be: short-shortsightedness and extreme individualism.”

My Response: I agree that there is considerable short-sightedness in our era, though it is probably less than in previous eras, when the average human lifespan was several times shorter than today. The extreme individualism, though, is not a phenomenon that I observe. I see all too many people bound by thoughtless traditions and norms, while refusing to think about matters on principle (instead of being attached to the concrete institutions and thought patterns that are fed to them by “opinion leaders” and the surrounding culture). The true individualist, who takes charge of his own life and is willing to engage in innovative thinking which transforms the world, is quite rare still. If asked to characterize our era, I would describe it as a time when the knowledge to solve many of the world’s problems is already available and accessible, but the willpower to solve these problems and overcome the constraints of obsolete institutions is lacking. I also see our era as characterized by a race between accelerating technological progress and increasingly outrageous authoritarian intervention.

Elu Sive Point 9: “We should practice future-oriented altruism: just as we care for others in our immediate vicinity in order to create a better life for everyone, we should care for our [descendants] as predecessors have, or we wish them to have had.”

My Response: I agree that we should look forward into the future and consider how life would be then, and how our current actions would affect future living conditions. I do not think that our focus should solely be on future beings, though. I hope to personally see a better future, and to structure my actions to maximize my chances. I am, though, happy to have been born into a world where the many generations of humans before me have already created an infrastructure of knowledge and capital to enable a relatively comfortable way of life. The great challenge of our time is to secure our lives against the still-omnipresent forces of ruin, death, and decay.

Elu Sive Point 10: “We should aim to replace humanity with post-human beings, remedied from most of the flaws that plague the human psyche and physiology today and in the past.”

My Response: I agree with remedying existing human flaws and transcending human limitations, with the important caveat that I consider such actions to be consistent with and to amplify humanity. Importantly, I think that we ourselves should be the beneficiaries of these improvements, through new medical treatments and augmentations (especially radical life extension), as well as the eventual integration of biological and non-biological components.

Are We Destroying the Earth? – Article by Sanford Ikeda

Are We Destroying the Earth? – Article by Sanford Ikeda

The New Renaissance Hat
Sanford Ikeda
October 3, 2012

People often complain that mankind is destroying the earth: that insatiable consumption and relentless production have laid waste to irreplaceable swaths of our planet, and that these activities have to stop or someday it will all be gone.

Which raises the question: What does it means to “destroy” something?

When you burn a log, the log is destroyed but heat, light, smoke, and ashes remain.  It’s in that sense that physics tells us that matter is neither created nor destroyed.  Similarly, cutting down a forest destroys the forest but in its place are houses and furniture and suburbs.

The real question is: Is it worth it?

Value Can Be Both Created and Destroyed

What people usually mean when they say mankind is destroying the earth is that human action causes a change they don’t like.  It sounds odd to say that my wife, by eating a piece of toast for breakfast, is “destroying” the toast.  But if I wanted that toast for myself, I might well regard her action as destructive.  Same action, but the interpretation depends on purpose and context.

When a missile obliterates a building and kills the people in it, it may serve a political purpose even though the friends and family of those killed and the owners of the building are harmed.  The perpetrator’s gain is the victim’s loss.  In the political realm, one person’s gain is necessarily another person’s loss.  You rob Peter to pay Paul; you kill Jack to appease Jill.  It’s a “zero-sum game.”

In the economic realm, however, a thing is destroyed to the extent that it loses its usefulness to somebody for doing something.  Someone may want to bulldoze my lovely home just for fun.  If she pays me enough I may let her do it and be glad she did.  When not physically coerced, a trade won’t happen unless each side expects to gain.  If it does happen, and if the people who traded are right, then all do in fact gain.  Each is better off than before. The trade has created something–value.  If they are wrong they destroy value and suffer a loss, which gives them an incentive to avoid making mistakes.

Profits and Losses Help to Minimize the Destruction of Value

In free markets gains manifest themselves in profit, either monetary or psychic.  (In the short run, of course, you can sustain a monetary loss if you think there’s a worthwhile nonmonetary aspect to the trade that will preserve the profit.)  Now, the free market is not perfect, despite what some economics professors say about the benefits of so-called “perfect competition.”  People don’t have complete or perfect knowledge and so they make mistakes.  They trade when they shouldn’t, or they don’t trade when they should.  Fortunately, profits and losses serve as feedback to guide their decisions.

There’s another source of market imperfection.  People may be capable of making good decisions but they don’t trade, or trade too much, because the property rights to the things they would like to trade aren’t well-defined or aren’t effectively enforced.  In such cases their actions or inactions create costs they don’t bear or benefits they don’t receive.  The result is that their decisions end up destroying value.

If I free-ride off the oceans, if for example I don’t pay for dumping garbage into it, then the oceans will become more polluted than they should be.  If there is a cleaner, more efficient source of energy than fossil fuels, but no one can profitably use it because the national government prevents anyone from doing so (for example by prohibitions or excessive taxation), then again the value that would have been created will never appear.

Aesthetics or Economics?

Our esthetic sense of beauty is part of what makes us human.  If we wish to protect a lake or a valley from development because we think it beautiful, how do we do that?

To some extent it’s possible to do what the Nature Conservancy does, and purchase the land that we want to protect.  But that’s not always possible, especially when the land is controlled not by private persons but by the national government, which makes special deals with crony capitalists in so-called public-private developments.  In any case, even the free market is not perfect.  Economic development and material well-being mean that some beautiful landscapes and irreplaceable resources will be changed in ways not everyone will approve.

Remember, though, that economics teaches us that an action is always taken by someone for something.  There are no disembodied costs, benefits, and values.  In a world of scarcity, John believes saving rain forests is more important than saving the whales.  Mary believes the opposite.  If we are to get past disagreements on esthetics–essentially differences of opinion–that can turn into violent conflict, we need to find some way to settle our differences peacefully, some way to transform them into value-creating interactions.

Imperfect though it may be, the free market has so far been the most effective method we know of for doing that.

Sanford Ikeda is an associate professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.