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How Bitcoin Challenges Keynesian Economics

We’re in the midst of two great economic experiments. The Keynesian ideal of central control of money is being challenged by a novel money called Bitcoin.

Brady Swenson
Brady Swenson
Feb 24, 2020February 24, 20207 min read7 minutes read

How Bitcoin Challenges Keynesian Economics

“We’re all Keyne­sians now.” Milton Friedman coined the phrase, often mis-cred­ited to Richard Nixon, back in 1965, and its truth changed since. Unless you began your Austrian economic educa­tion at birth in some unknown Austrian paradise on this planet at this partic­ular time in human history, we’re all Keyne­sians by default.

What’s a Default Keynesian?

A default Keyne­sian is a person who, probably unwit­tingly and passively, supports the central­ized monetary and fiscal policies that are descended from the ideas of econo­mist John Maynard Keynes simply because that’s the way things are now.

Who’s John Maynard Keynes?

He’s a dead econo­mist whose ideas currently have an effec­tive ideolog­ical monopoly on the global economy.

Why Does This Matter?

There are excel­lent resources avail­able to help you under­stand what money is and to learn its history, but here’s the gist:

Humans discov­ered money as a solution to the problems of barter, described by econo­mists as the coinci­dence of 'wants problem.'

Human society arrived at a consensus, or Schelling Point, that gold is the best money.

Over and over again through history, humans figured out how to centralize the power to control gold and inflate its value beyond its natural histor­ical infla­tion rate of about 1.5 — 2% (simply, the amount of gold we mine from the Earth yearly).

Most recently, this human drama took place through the creation of the US Federal Reserve in 1913, the global agree­ment to use the gold-backed dollar as the global money — the Bretton Woods agree­ment — in 1944, and the removal of the U.S. Dollar from the gold standard by Nixon in 1971.

Since then, central banks worldwide, including the United States Federal Reserve, have continuously inflated the money. They make printing it sound compli­cated and wise with lots of big words. Really it amounts to instantly creating more digital dollars out of thin air and giving it to big banks to lend or using it to buy lots of equities.

Keynes played a key role in all this by providing academic justi­fi­ca­tion for govern­ment and central bank inter­ven­tion during reces­sions through monetary policy (reduc­tion of interest rates) and fiscal policy (govern­ment spending).

The problem is that it is all too easy for central banks and govern­ments to lower interest rates, print money, and spend it in the face of a reces­sion as it is usually a popular thing to do in the short run. Still, the counter-cycle actions prescribed by Keynes to raise interest rates and taxes when the economy is growing are less popular and often never happen.

Keyne­sianism gives credence to the conceit that a few people can effec­tively improve the function of money in an economy by control­ling it. Govern­ments and central banks love that idea for obvious reasons. The current world economic order is run by Keyne­sian thinking. It’s simply the way things are now.

But now there’s another way.

The Red Pill at the Bottom of the Rabbit Hole

Two of the most loved Bitcoin metaphors are the red pill from The Matrix, and the rabbit hole, from Alice in Wonder­land. These two are invoked so often because they get at the idea that Bitcoin leads to an educa­tion, or reedu­ca­tion, on many fasci­nating topics. Chief among these topics is that Bitcoin is teaching us default-Keyen­sians what money really is — and this is the most impor­tant lesson Bitcoin teaches us.

What Money Really is

These days, like many before them, we’re forced to use certain monies by the decree and enforce­ment of national govern­ments and monarchs. But this isn’t what money really is. This is what we Bitcoiners refer to as “fiat money.”

Despite what default Keyne­sianism has us believing, money isn’t that compli­cated. Money is simply a good, asset, or technology that is deter­mined by the free market to be useful to solve the problems of barter and store the value of your labor over time. Money has network effects, just like the internet and the social networks built on top of it. Austrian economics hypoth­e­sizes that left alone by central author­i­ties, human markets will naturally converge on the best money, often called “sound money.”

As mentioned above, humans have, throughout history, converged on gold as the most sound form of money. Gold, however, could not escape control by central author­i­ties, so human societies have been engaged in a swing back and forth between sound money and some debased, inflated version of it.

A New Option: Bitcoin is the Best Money We’ve Found

The techno­log­ical miracle of Bitcoin is that Satoshi invented sound money able to resist capture by central author­i­ties. It is the first good, asset, or technology able to be free to operate as money for a global human economy. It is unable to be confis­cated, censored, debased, or inflated. Bitcoin is a profound 'Zero to One' moment, and the impli­ca­tions for human society are nothing short of revolutionary.

The Re-education of the Default Keynesian Masses

The collec­tion of economic ideas that have persisted as an alter­na­tive, like heroic cockroaches after a Keyne­sian ideolog­ical Armageddon, is called Austrian economics. Austrian economic thinking has been carried forth by small groups of devotees to the academic tradi­tion of Mises, Hayek, and Rothbard, polit­ical bands like the Liber­tar­ians of the United States, and specu­la­tors like the gold bugs.

The first Bitcoiners were the cypher­punks who came mostly for the tech. The next wave brought the Liber­tar­ians and gold bugs, who came mostly for the sound money. Based on my obser­va­tion of avail­able liter­a­ture, public internet commu­ni­ca­tions, and my private conver­sa­tions with Bitcoiners, it appears to me that both of these groups skewed heavily toward aware­ness of Austrian economic ideas compared to the general population.

I ran a Twitter poll earlier this week to ask Bitcoiners about when they first started learning Austrian economic ideas, before or after they discov­ered Bitcoin.

The results surprised some seasoned Austrian economics devotees. Right now, with a signif­i­cant sample set, it appears that two-thirds of Bitcoiners have been intro­duced to Austrian economic ideas by Bitcoin. We’re in a new wave of Bitcoin — one in which most new Bitcoiners are default Keyne­sians being taught what money really is by Bitcoin itself.

Two Great Experiments

We’re now amid competing exper­i­ments of epic propor­tions. Central banks and govern­ments worldwide have gone all-in on central­ized, infla­tionary monetary and fiscal policies. And the first sound money able to resist control by a central authority is competing against this central­ized model of money control.

Austrian economics has a new and better horse in the race. Where gold inevitably wore down in the face of the constant pressures to centralize control of money, Bitcoin seems able to resist and, indeed actually grow stronger in the face of central­iza­tion pressures.

We know very well from history that humans will centralize control of money if it is at all possible, and the value of central­ized money is proven to be inevitably debased and inflated away.

As the first sound money resis­tant to central control, Bitcoin is wealth insur­ance against the histor­i­cally probable eventu­al­i­ties of the central­ized control of money. It’s downright rational for all default Keyne­sians to hodl Bitcoin because the way things are now is no longer how it always has to be. There are default Bitcoiners being born every day.

Brady Swenson

Brady Swenson

Brady is a frequent guest on Bitcoin media such as Bitcoin Magazine, Bitcoin Rapid Fire, Bitcoin Audible, and Crypto Cousins. He also hosts two well-known Bitcoin podcasts, Citizen Bitcoin and Swan Signal Live.

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