In his latest appearance at the Texas Bitcoin Conference in Austin, Texas, Economist Robert Murphy attempted to debunk a few arguments that are generally made against bitcoin by various economists. Murphy comes from the Austrian school of economic thought, so it should be no surprise to find that he is at least somewhat interested in what Bitcoin has to offer the world. In his talk, which was titled “Mises Theory of Money, Bitcoin, and Saving the Economy Explained in 10 Minutes,” Murphy was able to illustrate the reasons why some Austrian economists are fascinated by bitcoin.
Falling Prices Don’t Cause a Bad Economy, It’s the Opposite
The first myth that Murphy wanted to hit was deflation. As many know, bitcoin is inherently deflationary as a currency due to its hard cap at 21 million — or at least it will be deflationary when that cap is finally hit (the current inflation rate is roughly 9%). Most economists, such as Paul Krugman, find deflation to be a horrible thing, which is why they do not think bitcoin could work well as a currency. Murphy made the point that economists who think this way may have it all backwards:
“Part of where this fear of deflation comes from is, historically, it’s associated with very bad economies. So, during the Great Depression of the 30s, there were falling prices. And there are other periods where prices fell when things were bad, but I would argue that the causality was the other way around. Partly what was going on there was people were concerned because the economy was so terrible. And, so what do you do when you’re afraid? You don’t want to invest in companies and things like that. You rush to liquidity. You rush to hard money. That’s why you often see in periods of panic people will rush to the money, so you see prices of all other things quoted in money fall. So, it’s not that the falling prices caused the bad economy. It’s the other way around.”
— Robert P. Murphy (@BobMurphyEcon) June 7, 2015
Prosperity Can Exist with Falling Prices
Murphy went on to point out that there have also been periods in history where consumers prices have fallen during times of prosperity. Perhaps the most often-cited example here — at least from the Austrian perspective — would be the period in world history that is usually referred to as the Long Depression. Although prices fell during these years, other measurements of economic activity seemed to be moving in the right direction. A.E. Musson explained this in his book, The Great Depression in Britain, 1873-1896: a Reappraisal:
“Prices certainly fell, but almost every other index of economic activity – output of coal and pig iron, tonnage of ships built, consumption of raw wool and cotton, import and export figures, shipping entries and clearances, railway freight clearances, joint-stock company formations, trading profits, consumption per head of wheat, meat, tea, beer, and tobacco – all of these showed an upward trend.”
Of course, whether or not deflation is a net good for the entire economy does not matter when it comes to the adoption of bitcoin as a currency. If one currency is deflationary and another currency is inflationary, which one would the general public rather store over the long term? Obviously, individuals will choose the one that rises in value over time. Even if many economists are right in that bitcoin’s deflationary nature is “evil,” it won’t necessarily stop people from choosing it over other available options.
Kyle Torpey is a freelance journalist who has been following Bitcoin since 2011. His work has been featured on VICE Motherboard, Business Insider, RT’s Keiser Report, and many other media outlets. You can follow @kyletorpey on Twitter.