What would Hayek and Friedman think about Bitcoin?

Original title: "What would two of the world's most famous economists think about Bitcoin?"

Original source: Shawn Tully, Fortune

Original compilation: Nanfeng, Unitimes< /blockquote>

This is a legendary debate between two of the greats of 20th century monetary economics over whether "challenger money" will replace government The supported standard currency, becoming the most popular payment medium in the world. What might these two great men think of Bitcoin even though it has only been a few decades since its invention? Do they think Bitcoin has the potential to rise and become a competitor to fiat currencies?

One side of the debate is advocating classical liberalism Friedrich Hayek, an Austrian-British economist, played against Milton Friedman, a free-market advocate. The two economists are generally on the same page, but the stand-off centers on whether competing privately issued currencies would create a more stable monetary system.

When these two economists faced off over this issue in the mid to late 1970s, the dollar system Entering the most volatile period since World War II, the price of gasoline, airfare and home heating in the United States has soared due to the Arab oil embargo. In response to this shock, the Federal Reserve (Fed) flooded the market with money (quantitative easing of money), weakening the purchasing power of the dollar against almost all other goods, and the consumer price index, which has traditionally grown at a steady and moderate pace, has The growth rate reached 14%.

Hayek taught at the University of Chicago from 1950 to 1962, during which time he and Friedman taught at the school Long-term tenures overlap, so the two economists know each other well. But the two did not debate face to face. Hayek laid out his views in a series of lectures and papers in the mid-to-late 1970s and in his 1976 book, The Denationalization of Money. The duo's views have yet to clash, according to reports, at industry events in the 1970s and 1980s. Friedman's first public criticism of Hayek's ideas appeared in a book he co-authored with the economist Anna Schwartz in the 1980s.

At the time, politicians, academics, and ordinary people alike feared that the dollar system was headed for collapse. At that time, the Fed was pursuing the opposite of the "sound money" policy of the past, devaluing the dollar faster than American workers could earn it. Hayek believed that in times of economic hardship, central banks would continue to overinflate the money supply, thereby artificially boosting the economy rapidly, which would trigger the kind of crisis that the United States was experiencing at the time. currency inflation. The solution, Hayek believed, was for private currencies issued by banks or other companies to compete with sovereign currencies in an open market.

The currency or currencies that do the best job of maintaining consistent purchasing power for consumers and businesses will attract the most consumers and win.

According to Hayek's point of view, if the Federal Reserve continues to issue a large number of dollars and make its purchasing power weaker and weaker, private issuance and Managed competing currencies would replace the unstable dollar. This "let the best currency win" philosophy will allow governments to stop this reckless monetary policy and either force central banks to reform or open the way for new, more stable currencies to come to power.

  Two of the most outstanding economists of the 20th century: Milton Friedman (left) and Friedrich Hayek (right)

Friedman is not opposed to having other currencies compete with fiat, but he thinks Haye Get it wrong and the Challenger Coin will fail. For Friedman, individuals and companies do care about the purchasing power of a currency, but they care more about whether they and their neighbors and trading partners use the same currency. Friedman believes that consumers and businesses prefer to use one currency for everything.

Even if another alternative (let's call it xyz coin) is more stable than the dollar, Americans would rather only use dollars than trade in xyz Frequent exchanges back and forth between coins and dollars. As such, Friedman argues, fiat currencies enjoy a huge advantage due to their overwhelming widespread acceptance that will prevent other competing currencies from taking their place.

For fans of bitcoin, Hayek's stance makes him the "godfather" of the largest cryptocurrency by market cap ". In a 2012 study on virtual currencies, the ECB stated that "Bitcoin's roots can be found in the Austrian school of economics," while Haye Ke is the main representative of the Austrian school of economics. If you Google "Hayek and Bitcoin," you'll see tons of bloggers and academics posting articles declaring Hayek as "Cryptocurrency Prophet" and cites a TV interview from the 1980s as proof that the famous economist once "predicted Bitcoin." In fact, they believe that the market will eventually gravitate toward the most stable, reliable currency that won't be corrupted by central banks, and that's Bitcoin.

Many Bitcoin enthusiasts believe that Bitcoin has great promise as a store of value, but not necessarily as a currency in this way. MicroStrategy CEO Michael Saylor, known for stashing billions of dollars worth of bitcoin on the web service provider's balance sheet, thinks bitcoin is a great investment but predicts it will never will be the medium of exchange. In contrast, Tesla CEO Elon Musk said, "Paper money will die, and cryptocurrency is a better way to transfer value, that's for sure .” Twitter and Square CEO Jack Dorsey is also bullish on Bitcoin, predicting that “the world will eventually have a single currency, and I personally Think that’s Bitcoin.” Cameron Winklevoss, founder of Bitcoin trading platform Gemini, said that Bitcoin will gain traction as a superior currency, “because of all this money printing, people see that it’s happening right now. “Wait, where did all these trillions of dollars that were printed come from? They’re really just printed paper, so what does that mean for my dollars?”

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But in fact, Bitcoin is rarely accepted in daily consumption, although it has a certain role in money transfer, especially for those who need high Privacy transactions. "If people are really flocking to buy bitcoin, then Hayek is wrong because he predicts that people will choose the currency with the most purchasing power," said William Luther, an economics professor at Florida Atlantic University. Stable currency. You know, the kind of currency that Hayek likes is very stable, while Bitcoin is the opposite, it is very volatile.”

From Friedman's point of view, the possibility of Bitcoin replacing the dollar or the euro is very small, because everyone only The cheapest and most convenient currency will be used. The exceptions, if any, are in countries that have implemented highly inflationary monetary policies that both destroy the purchasing power of fiat currencies and cause prices to skyrocket. In times of extreme volatility, Friedman argues, consumers will use some kind of stable foreign currency to trade goods on the black market, just as Venezuelans now use dollars and euros. But they don't use bitcoin to buy groceries or pay rent for the same reasons they don't use bolivars: Bitcoin fluctuates wildly daily, Intraday fluctuations of up to 9% are common, which means that the average family never knows what their money will buy today or tomorrow.

Hayek and Friedman have serious disagreements over the prospects for a "challenger currency". But their views on Bitcoin should be similar:They should both praise Bitcoin as a bold free market experiment, but neither should think that Bitcoin will become A major form of currency. Of course, Hayek made his point before the return of US monetary policy to a more stable trajectory in the 1980s and beyond. For Hayek, the switch to bitcoin would be down the wrong path, from a relatively stable currency to one that is deeply volatile; Same thing with new currencies: almost impossible to gain widespread acceptance.

But contrary to what Bitcoin proponents say, the two legends should agree that Bitcoin's architecture has a fundamental flaw that prevents its supply from periodically adjusting to maintain its purchasing power. Let's see first, even if bitcoin is the most sound currency, can it compete with the dollar; Friedman on the properties that a sound currency should have, that is, whether Bitcoin can protect the interests of consumers and businesses in the long run.

Friedman: Bitcoin loses in "network effects"

Friedman believes that due to the so-called "network effect", the mechanism of "multiple competing currencies in parallel" proposed by Hayek will not work. The idea is that an item's popularity is determined by how many people use it;In terms of currency, the group of consumers and businesses transacting in dollars or euros represents The size of its "network". According to Friedman, the more people use dollars, the easier and cheaper it is for them to buy and sell goods and transfer money. In this regard, economics professor William Luther explained: "If all my customers and trading partners use dollars, and all their customers and trading partners use dollars, then I will also use dollars to save time and money. Instead of using euros or other currencies."

If a business or consumer switches to another currency, when they need to communicate with their neighbors Or when a customer makes a transaction, since the latter is using U.S. dollars, this will incur a cost for itself to convert this currency into U.S. dollars. These are additional transaction costs. Transacting in a generally accepted currency reduces transaction costs compared to using a relatively uncommon currency.

Luther added: "There are also 'switching costs.' When you use a new currency as a medium of payment, you need to update those machines.” Additionally, businesses need to adjust their pricing and accounting systems to accept payments in currencies other than this local currency.

Friedman believes that the single currency has Great advantage, because it saves a lot of time and cost compared to a multi-currency system. He believes that transaction and exchange costs are so high that people and businesses will choose the current currency even if it is somewhat unstable. He pointed out that the deutsche mark and the Swiss franc have held their value much better than the dollar over time, and that U.S. citizens use both currencies when they travel, but they don't use them at home , because converting it back and forth to dollars is very expensive.

In contrast, Hayek believes that compared to Transaction costs, people are more sensitive to fluctuations in currency value. Luther said: "Hayek said that in the absence of legal restrictions, the cost of exchanging money is negligible. What matters is which currency is superior." According to Hayek, if a country Allow private currencies to compete with fiat currencies, and consumers will be attracted to the best currency. They dump sovereign currencies that are volatile and lose their purchasing power, in favor of new, reliable currencies.

Hayek believed that a winning "challenger currency" would need to ensure that a certain amount of the new currency could be purchased with the same or nearly the same goods and services without deteriorating purchasing power like fiat currencies. Hayek wrote: "The main attraction that the issuer of a competing currency must offer is assurance that its price will remain stable."

So, in countries with profligate monetary policies, why haven't people turned to privately issued currencies? According to Hayek, this is simply because local laws prohibit these competing currencies; but for Friedman, the legal provisions do not matter, except in a few extreme cases, otherwise consumers and businesses will think that adopting one The cost is too high for a currency that most neighbors and shops don't use.

A few years later, the case of Somalia supported Friedman's point. In 1991, the Somali government collapsed. At the time, the Somali shilling was the most widely circulated currency in the country. Citizens were free to use whatever currency they wanted, and several local currencies competed with the shilling, whose value rapidly fell. Most people continue to do business in shillings despite at least one competing currency being more stable. In this case, Friedman’s “network effects” trumped Hayek’s idea that the desire for stable monetary values would prevail. Surprisingly, Somali citizens can also use US dollars, but the shilling has not been replaced. Even Friedman might be surprised by the power of network effects in Somalia.

Bitcoin Design Flaws

Friedman and Hayek agreed that the most ideal monetary policy is to achieve stable, predictable and appropriate price growth. But early in Friedman's career, he disagreed with Hayek on how to achieve that goal. Friedman argued early on that the need to hold money is inversely proportional to the "velocity of money," which is essentially constant over time. Therefore, in his view, the Fed should increase the money supply at a given fixed rate.

For example, if the central bank's target is 2% inflation, and the economy typically grows at 2%, then best The best way to do this is to increase the money supply by 4%. The 4% increase in the money supply would then facilitate a 2% increase in the volume of transactions in goods and services, thereby achieving the 2% price inflation target. Luther said, "Friedman wants the Fed to set money growth at a fixed rate. It's called the K percentage rule, where K is a fixed rate of growth in the money supply."

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As Luther pointed out, this K-rule looks a lot like Bitcoin's pattern. We know that Bitcoin's algorithm limits the issuance limit of this cryptocurrency (there are only 21 million bitcoins in total), and provides a basis for the issuance of new bitcoins A fixed issuance rate is set (approximately one block is mined every ten minutes, and the block reward is halved every four years). "You might think that Bitcoin is similar to Friedman's Rule of K," Luther said. But Bitcoin's supply is pre-programmed and inflexible, which is an obvious weakness. Hayek wanted to stabilize the purchasing power of the money supply through expansion and contraction. "Hayek argued that if money growth outstripped money demand, it would lead to an unsustainable productive boom that would eventually lead to a recession. Firms would be misled into overproducing and would eventually have to downsize at enormous cost ,” Luther added.

In the 1980s, Friedman revised his view, moving closer to Hayek. He found that the demand for money varied much more than he had previously thought. He therefore embraced inflation targeting and advocated adjusting monetary policy to the economy. “Friedman argued that a recession would ensue if the supply of money plummeted more than the demand for money fell, or if the increase in demand for money was not met by a corresponding increase in the money supply,” Luther said. " Friedman, like Hayek, began to believe that money supply should synchronize with money demand. ”

Bitcoin is not designed to provide for growth or Reduce the flexibility of its supply, because the number of newly issued bitcoins does not vary with the ebb and flow of holding demand, which both Friedman and Hayek believe is a sign of sound monetary policy. Bitcoin's supply is predetermined by its algorithm and does not have the "shock absorber" function that Hayek and Friedman considered essential. "Bitcoin is designed so that it cannot maintain constant purchasing power as demand changes," Luther said.

Since the number of bitcoins is fixed, Only the increase or decrease in the number of bitcoins purchased by individuals and funds will drive its price up or down. As Luther said, "Bitcoin is designed so that only demand shocks affect its price."

Let's imagine a Bitcoin A world in which currency replaces the dollar. If the economy suddenly grows rapidly, GDP growth soars from 2% to 3%. In a Friedman or Hayek model, the Fed might increase the money supply by a percentage point in this scenario, which would increase the supply of credit to meet loans and bond issuance for new factories, laboratories, and research centers need. Thus, the overall inflation rate remains unchanged. But Bitcoin cannot increase its supply. Under Bitcoin, interest rates would spike as demand for credit outstrips what banks and investors can lend. The resulting austerity will quickly lead to the bust of an economic boom.

Furthermore, economic changes amplify changes in the price of Bitcoin for the same reason. Consumers and businesses rush to buy bitcoin-denominated bonds and loans during good times and sell these investment vehicles during downturns, but bitcoin There will be no change in the issuance speed of the currency to buffer this fluctuation. In times of economic prosperity, the price of bitcoin can rise significantly because no more bitcoins will be issued; and the Fed can issue more dollars, thereby inhibiting the rise in dollar prices.

In addition, large fluctuations in the price of Bitcoin will also increase the risk of multinational companies because of the high volatility of Bitcoin as payment Medium, meaning the prices multinationals pay to buy semiconductors, appliances or textiles produced in China, Japan or Germany are constantly changing.

Volatility issues

Currently, Bitcoin is too volatile to function as a currency. "Small changes in bitcoin's attractiveness relative to other currencies can have a huge impact on how many people want to use bitcoin in the future," Luther said. "If we hear bad news about bitcoin, people will feel like using it." There will be fewer people, and then the price will suddenly drop."

For example, when Elon Musk announced Tesla Bitcoin skyrocketed when Musk bought $1.5 billion worth of it, then plummeted when Musk announced that the company had decided not to accept payments in it because of its energy-consuming problems. As another example, when Visa and Mastercard suspended payment services to the adult website Pornhub, causing the site's users to switch to bitcoin and other cryptocurrencies, the price of bitcoin also rose.

Today, Bitcoin is as volatile as the S&P 500 9 times that of gold. Even if Bitcoin gains wider acceptance, its price will still experience higher peaks and deeper troughs than competing currencies because Bitcoin's design does not allow its Reduce its volatility through changes in supply.

Even if Bitcoin proponents are right that Bitcoin will become more stable over time, But it's still unlikely to succeed as a currency. The reason is twofold: First, Bitcoin's rigid structure cannot guarantee its purchasing power, because, as we discussed above, Bitcoin's issuance is completely Flexible; second, countries may adopt their own digital currencies. For example, China has announced plans for a digital yuan, and this news alone has hit the price of Bitcoin.

Luther said: "The United States can also create a digital currency. The Fed issues dollars and holds digital dollar balances on behalf of banks. It could create a new category called a "digital dollar," equivalent to cash and reserves. Consumers can convert digital dollars into cash. "People can exchange digital dollars between wallets like Bitcoin, without going through a bank, or by scanning their iPhone at the checkout to pay, so that the payment goes from the consumer's iPhone wallet to the retailer's digital dollar account." . These payments would be made outside the credit card system and avoid high "transaction fees". "A major danger for bitcoin is that it could be overtaken by digital currencies issued by central banks," Luther said.

What is the future of Bitcoin?

Digital currencies issued by sovereign countries will further limit the future of Bitcoin. But bitcoin has strong potential as a niche medium of exchange for transactions, especially large ones where privacy is paramount. "Bitcoin does this exceptionally well, and other currencies don't do it well," Luther said.

Of course, Governments will try to crack down on bitcoin being used in many illicit transactions, including paying ransoms for ransomware attacks. But Bitcoin is difficult to control, which is another of its strengths. Luther said: "It is much more difficult for governments to stop bitcoin transactions than to prevent the use of cash, although it is also used for underground transactions today."

Luther has carefully studied the views of influential monetary economists. How does he think Friedman and Hayek would think about Bitcoin? “They will applaud the growth and relative success of this experiment [namely bitcoin],” Luther said. “In theory, they will see it as an effective deterrent to unrestrained government spending. But they want Bitcoin clearly does not have a money supply mechanism that takes into account changes in the demand for holding money. Friedman or Hayek would never have argued that Bitcoin could or should replace the U.S. dollar as the main currency in the United States. Currency. They may agree that Bitcoin is best used for what it is used for now, which is to keep transactions private.”

Bitcoin has grown into a behemoth in today's financial world. But as two greats like Hayek and Friedman might have concluded, as the world realizes that Bitcoin's future is very niche, its lofty image will gradually fade.

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