Abstract
Blockchain technology has been hailed as a technology that could transform large sectors of the economy. The key tenets of the Austrian School will be complemented by blockchain as it allows for private digital currencies and decentralised trading networks free from the control of authorities. Several Austrian School economists, including Hayek, have written about the benefits of private, competing currencies. Orthodox economics will struggle intellectually to model the consequences as it is axiomatic for much of their macroeconomics that central banks can stimulate the economy through the money supply. For the Austrian School, reducing the monetary policy tools of central bankers will bring benefits to the economy.
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Notes
- 1.
For a more detailed analysis of Mesopotamian ledger systems, see Snell’s (2007) Ledgers and Prices: Early Mesopotamian Merchant Accounts (Yale Near Eastern Researches).
- 2.
It was in the Summa de arithmetica, geometria. Proportioni et proportionalita (1494) that double entry bookkeeping was first outlined in print along with other areas of mathematics including algebraic theories of the time. Double-entry accounting also possibly developed independently in Korea in the Goryeo dynasty (918-1392) during a time when Kaesong was a regional trading centre.
- 3.
Although around the middle of the thirteenth century in Toulouse 96, shares of the Société des Moulins du Bazacle (Bazacle Milling Company) traded at a value derived from the profits of the mills the society owned, arguably making it the first company. This concept, however, did not proliferate at the time as it would later in the eighteenth century.
- 4.
See Cerf et al. (2012) in “Brief History of the Internet” from the Internet Society.
- 5.
Nakomoto, S (2009) “Bitcoin: A peer-to-peer electronic cash system”. (http://bitcoin.org/bitcoin.pdf).
- 6.
There are now different types of blockchain; some are permissioned (require permission from an authority to access them) while some are permissionless. See the UK Government’s Chief Scientific Adviser’s report on blockchain (Walport 2016) for more information.
- 7.
For a more general introduction to blockchain, see Swan (2015).
- 8.
This is from a 1999 interview with Nobel Laureate Milton Friedman conducted by NTU/F (https://www.youtube.com/watch?v=6MnQJFEVY7s).
- 9.
In most of the key textbooks of macroeconomics, for instance Mankiw’s Principles of Economics (1997, 2014), it is axiomatic to many of the arguments that central banks can “stimulate” the economy through control of the quantity of money.
- 10.
Lecture to the memory of Alfred Nobel, December 11, 1974.
- 11.
See Roger Garrison Time and Money: The Macroeconomics of Capital Structure, Routledge, 2001.
- 12.
See especially Carl Menger The Origins of Money (1892).
- 13.
Carl Menger’s Lectures to Crown Prince Rudolf of Austria (1994) edited by Erich and Monica Streissler, see p. 171 where Menger also relates interest rates to the “abundance of capital” in the economy.
- 14.
Carl Menger The Origins of Money (1892, pp. 34).
- 15.
See for instance p. 225.
- 16.
In this vein The Bank of England, in their analysis of digital currencies (Ali et al. 2014a: 278), considered Radford (1945) with respect to the three functions of money—a store of value, a unit of account, and a medium of exchange—who documented “that cigarettes served all three of these roles within prisoner of war camps during the Second World War”.
- 17.
In The General Theory of Employment, Interest, and Money Chapter 17, Keynes (1936) noted that “As a footnote to the above, it may be worth emphasising what has been already stated above, namely, that ‘liquidity’ and ‘carrying-costs’ are both a matter of degree and that it is only in having the former high relatively to the latter that the peculiarity of ‘money’ consists....There is, clearly, no absolute standard of ‘liquidity’ but merely a scale of liquidity—a varying premium of which account has to be taken”.
- 18.
In Aristotle’s Politics Book 1:9[1] (c.350 B.C. translated by Sinclair, revised and re-presented by Saunders (2000)) The Philosopher considered money and came to the conclusion that in a market every good has two uses, first it has the use for which it was designed, the second use being as an item to sell or barter—effectively a form of moneyness as value of such goods in the secondary sense rests largely on their liquidity in the market. Copernicus, in his 1526 report on monetary systems to the King of Poland and the Prussian Diet, included a rudimentary form of the quantity theory of money and Gresham’s Law as well as an early notion of moneyness.
- 19.
See Rosenfeld, Meni (2012). Overview of colored coins. White paper, bitcoil.co.il.
- 20.
Hayek (1978, p. 57), in The Denationalisation of Money, explained that the roots of this conception of money may lie in the legal convenience of it, “Similarly, the legal fiction that there is one clearly defined thing called ‘money’ that can be sharply distinguished from other things, a fiction introduced to satisfy the work of the lawyer or judge, was never true so far as things are to be referred to which have the characteristic effects of events on the side of money. Yet it has done much harm through leading to the demand that, for certain purposes, only ‘money’ issued by government may be used, or that there must always be some single kind of object which can be referred to as the ‘money’ of the country. It has also, as we shall see, led to the development in economic theory of an explanation of the value of units of money which, though under its simplified assumptions it gives some useful approximations, is of no help for the kind of problems we have to examine here”.
- 21.
One of the key criticisms of Bitcoin has been the volatility, for instance the Bank of England point out that “The standard deviation of daily moves for bitcoin is roughly 17 times greater than that for sterling. The worth of bitcoin as a medium or long-term store of value, however, depends on the strength of demand over time, which will in turn depend on users’ evolving beliefs about the ultimate success of the digital currency”.
- 22.
For one of the pre-Bitcoin analyses of smart contracts, see Szabo, N. 1997. Formalizing and securing relationships on public networks—Szabo summarises the concept neatly “The basic idea behind smart contracts is that many kinds of contractual clauses (such as collateral, bonding, delineation of property rights, etc.) can be embedded in the hardware and software we deal with, in such a way as to make breach of contract expensive (if desired, sometimes prohibitively so) for the breacher”.
- 23.
See the Financial Times article “Central banks explore blockchain to create digital currencies” (https://www.ft.com/content/f15d3ab6-750d-11e6-bf48-b372cdb1043a).
- 24.
Altcoin is the term given to the plethora of digital currencies which arose following the development of Bitcoin, for a list of market capitalisations, see here (https://coinmarketcap.com/).
- 25.
The Bank for International Settlements (BIS Working Papers No 346) has commented on this, “In the canonical New Keynesian paradigm, rather paradoxically, they are entirely redundant or at least inessential. The canonical model is that of a money-less economy that can do away with the ultimate settlement medium (Woodford’s (2003) “cashless economy”). Indeed, paradoxically, when settlement balances (money) are introduced, they act as a “friction”, not as the indispensable lubricant in an otherwise inefficient barter-exchange mechanism. It is an economy in which credit is just a vague shadow in the background: since credit does not affect behaviour, its evolution does not need to be tracked. When banks are introduced, credit may have more information content. But, even then, intermediaries do not generate purchasing power; they simply transfer real resources from one sector to the other. The underlying economy is, in this sense, a real economy disguised as a monetary one. Credit is just another real resource that households make available to entrepreneurs. This contrasts sharply with the essence of monetary analysis.”
- 26.
Friedrich Hayek, The Fatal Conceit (1988, Ch. 5 p. 84).
- 27.
See, for instance, the Bank of England’s “multi-year research programme into the implications of a central bank, like the Bank of England, issuing a digital currency” (http://www.bankofengland.co.uk/research/Pages/onebank/cbdc.aspx).
- 28.
Locomotive Act 1865.
- 29.
For one of the first examples of a more elaborate blockchain network where the functionality goes well beyond the monetary aspects, see the evolution of Vitalik Buterin’s initial papers from Buterin, Vitalik (2014a). Multisig: The Future of Bitcoin. to Buterin, Vitalik (2014b). A next-generation smart contract and decentralized application platform. White Paper.
- 30.
- 31.
See the full speech here http://www.bankofengland.co.uk/publications/Pages/speeches/2015/840.aspx
- 32.
For a fuller discussion, please see IMF working paper WP/15/224 (Agarwal and Kimball 2015) Breaking Through the Zero Lower Bound.
- 33.
See Chapter 5 p. 76, the full quote is as follows “If we had deliberately built, or were consciously shaping, the structure of human action, we would merely have to ask individuals why they had interacted with any particular structure. Whereas, in fact, specialised students, even after generations of effort, find it exceedingly difficult to explain such matters, and cannot agree on what are the causes or what will be the effects of particular events. The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design”.
- 34.
- 35.
- 36.
For an interesting summary of peer-to-peer lending, see The Business Models and Economics of Peer-to-Peer Lending by Alistair Milne and Paul Parboteeah (European Credit research Institute No. 17 / May 2016).
- 37.
See Roger Garrison’s “Time and Money: The Macroeconomics of Capital Structure” (2001) for an exposition of Austrian Business Cycle Theory compared to other related theories from other schools of economics.
- 38.
I will avoid using the term “natural rate of interest” since it has been used by different economists to convey often incompatible ideas.
- 39.
See for example this outline of monetary policy by the Bank of England (http://www.bankofengland.co.uk/monetarypolicy/Pages/how.aspx).
- 40.
- 41.
In The Positive Theory of Capital (1891), written 7 years after Capital and Interest, von Böhm-Bawerk outlines the heterogeneity of capital by using the metaphor of a growing tree; the tree grows in different ways at different stages and exogenous manipulation will distort its natural growth patterns.
- 42.
See, for example, Murray Rothbard’s “America’s Great Depression” (1963) for an elaborate analysis of the formation of a bubble.
- 43.
See The Economics of Housing Bubbles by Mark Thornton (2006).
- 44.
Austrian School tendencies are far from alien to the BIS which has cited the work of Hayek several times.
- 45.
- 46.
Note that “VCs” are “virtual currencies”.
- 47.
The issue of deflation, which surrounds this, was addressed from an Austrian School perspective in Selgin, G (1997): Less than zero: the case for a falling price level in a growing economy in which he challenges the assumption in much of modern economics that deflation is harmful.
- 48.
In Bank of England Chief Economist Andy Haldane’s speech “How Low Can You Go?”, he set forth this very point (note that the ZLB he refers to is “zero lower bound”) “These questions do not have easy answers. That is why work on central bank-issued digital currencies forms a core part of the Bank’s current research agenda (Bank of England 2015). Although the hurdles to implementation are high, so too is the potential prize if the ZLB constraint could be slackened. Perhaps central bank money is ripe for its own great technological leap forward, prompted by the pressing demands of the ZLB”. http://www.bankofengland.co.uk/publications/Pages/speeches/2015/840.aspx
- 49.
See Robert Shiller’s Irrational Exuberance (2000); the updated 2015 version includes commentary on the current valuations of bonds and stocks.
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Rangeley, M. (2018). Blockchain: The New Intellectual Battleground Within Economics. In: Godart-van der Kroon, A., Vonlanthen, P. (eds) Banking and Monetary Policy from the Perspective of Austrian Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-75817-6_13
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