Early last month, Economist Paul Krugman was asked for his opinion on digital currencies, such as bitcoin, at a 92Y event called The Genius of Economics. Krugman has shared his views on bitcoin more than once over the past few years, and he has even gone as far as to say it is “evil.” During the recent event, which also featured Thomas Piketty and Joseph Stiglitz, Krugman again talked about his perceived problems with bitcoin; however, anyone who truly understands digital cash could tell that the Nobel Memorial Prize in Economic Studies winner had no idea what he was talking about.
No, We Don’t Already Have Digital Cash
The key problem with Krugman’s view on bitcoin seems to be that he doesn’t understand why it was created in the first place. It’s easy to understand why Krugman would believe bitcoin is “a bubble in multiple senses” when he does not see the key attributes of Bitcoin that make is so revolutionary. It became clear that Krugman was completely out of his element on bitcoin when he compared the digital cash system to credit cards:
“If you’re looking for the idea that a currency doesn’t really have to be something physical, and it can be something that is virtual — that’s the system we already have. You know? If you want it to be [a] way to make payments electronically, that’s credit cards. So, exactly what it is that this thing is supposed to be doing that we don’t already mostly do — I mean, there are technical differences, but it’s pretty wild.”
Digital cash and credit cards are two entirely different systems. One system (credit cards) is based on IOUs, while the other (bitcoin) creates a situation where the ones and zeroes are the actual value. There are countless other differences between the two online payment mechanisms, but this is the key point that makes everything else, such as censorship-resistant payments, in Bitcoin possible. If someone wants to have true control over their digital assets, then they’ll need to hold bitcoin rather than fiat currency in a bank account.
The Underlying Value of Bitcoin
After realizing that Krugman does not have an understanding of the key reasons people are already using bitcoin in the first place, it becomes easier to see why his overall views on bitcoin are off-base. He pointed out the fact that people have to use US dollars to pay taxes in the United States is the “anchor” for that particular currency, and he stated no such anchor exists with bitcoin:
“There is the anchor for our dollar bills, which is not gold. It is the fact that you can use it to pay taxes. And then you have somebody try and create bitcoin, which is — there’s nothing in the end. It’s supposed to be purely self-fulfilling prophecy, purely levitating on itself — which is not impossible, but is kind of unlikely.”
Of course, there actually is an anchor for bitcoin as well in the form of censorship-resistant digital payments. This fundamental use case of Bitcoin has been displayed multiple times throughout the digital payment system’s short history, but the most obvious and popular illustration of this point would have to be Silk Road. If you want to pay taxes in the United States, you use US dollars. If you want to make an online transaction that cannot be blocked by a third party, you use bitcoin. There are other fundamental use cases for bitcoin, but this is the one that can counter Krugman’s point in the most succinct manner.
A Technical Achievement with No Economic Value?
This last statement from Krugman, again, goes back to the economist’s ignorance of the fact that decentralization is the point of Bitcoin:
“Apparently it’s a technically sweet solution to a problem, but it’s not clear that that problem is one that has much economic relevance. Certainly not a reason to hold that currency.”
Unless Krugman has developed a workable alternative to proof-of-work, a large amount of hashing power is still required to secure the Bitcoin network. The bitcoin token will then need to be rewarded to miners who are providing that security to the network. Sure, there are many proposals for permissioned distributed ledgers that could work for specific applications, but people aren’t going to be purchasing weed on darknet marketplaces with an IMF-controlled blockchain at any point in the near future.
Featured image via DonkeyHotey.
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.