Wednesday, July 16, 2014

The Bitcoin Standard

Is Bitcoin a currency? Is it money? Are those the same thing? They're not but I don't think that matters. Inspired by this episode of Econtalk, the more I think about it, the more I think Bitcoin could be revolutionary for the very fact that it is not a currency, but a wonderfully transportable, fraud-resistant, commodity. This approach is going to be controversial because many worry that if Bitcoin is not commonly accepted as currency, then it is doomed. I don't agree and I'm going to try to explain why as best I can.

Across history, various commodities have acted as money in different places and times: examples include grains of rice, arrow heads, giant disc-shaped pieces of limestone, salt, silver, and eventually gold. These are referred to collectively as "commodity money". These come to be accepted as payment because of the transactions costs of barter; it’s hard to find someone to trade with who had exactly what you wanted and also wanted what you had (called the double-coincidence problem). All forms of money solve that problem to some degree. You just accept money for your goods and use it to buy whatever you want.  The system works because even if the commodity is useless to you it is valuable to many. You accept it only because it has value to others who will give you what you want in return.

Where it gets interesting is that, across history, commodity money such as gold always gives way to a commodity "standard" where the commodity itself does not have to be transferred. Instead, people are happy to accept notes/guarantees issued by a trusted source. The guarantee allows the bearer to exchange their note for the commodity that is being stored by a trustworthy institution. This move to a commodity standard happened spontaneously throughout history and will always be the case with commodities. People don't want to physically transfer the actual commodity, they just want to change its ownership as simply as possible.

Take gold as an example; in a gold "standard", buyers and sellers accept notes that can be redeemed for gold safely held by the government in vaults. Originally goldsmiths issued the notes but because of counterfeiting, deception, coin-shaving, and all manner of other economic forces (such as international trade) government-issued notes and coin -  stamped, assured, and reliably redeemable for gold - were the only ones that were trustworthy. These notes and coins were valuable only because you could trust that you could exchange the currency for gold. 

The gold "standard" went away in the 20th century as governments issued more and more notes and decided that people were so used to using them, that they no longer needed to be able to redeem them for gold, at all. Currency that has no redeemibility, nothing "backing" it, is called fiat currency. The US dollar is a fiat currency. It is accepted for payment because everyone believes they can use dollars to buy whatever they want at some point in the future.

Enter Bitcoin.

Bitcoin is a commodity but not a "currency". Specifically, it is commodity money. It is  "mined" like gold. Additionally, Bitcoin's supply is mathematically limited to 21 million coins, each coin being harder to get than the last as the math problems that need to be solved to mine a new Bitcoin become more and more difficult to solve. This causes a major economic problem. Bitcoin, like gold, is naturally deflationary. You know your Bitcoin is rare, so you think it will be more valuable tomorrow. If it's more valuable, that sweater you want to buy will feel cheaper if you just wait a day or two. If everyone would rather keep their Bitcoin rather than spend it, then no one buys anything. Economic collapse ensues.

Interestingly, gold has the same problems, it is harder and harder to find and gets more and more valuable. However, government simply issued more and more notes to avoid the dilemma posed by deflation. People spent their notes because their value was eroded as more notes were printed. 

Where does this leave us? Bitcoin is basically the same as gold. It might just be chains of numbers in a computer file, but gold is just a bunch of atoms, protons, neurons and other sub-atomic particles. Most people wouldn't know a real versus a fake gold bar if it hit them in the face, and certainly wouldn't have any use for it. It is valuable to you only because other people think it is. Bitcoin is exactly the same.

But if Bitcoin is valuable, then a contract/note that promises it can be redeemed for Bitcoin is also valuable. I don't see why we couldn't have a new currency backed by Bitcoin. I'm calling it the Bitcoin Standard. 

There would be notes and coins, bank accounts, etc. denominated in "Bitcoin" but that are merely fictions provided by banks that we "trust" can give us Bitcoins if we ask for them.  This would preserve many of the great features of Bitcoin but avoid the deflation problem. 


Remember, this exact process happened with all other forms of commodity money. The history of the shared illusion that is money is fascinating. It is possible Bitcoin is different but it really isn't. It's just a matter of time.  

Tuesday, July 8, 2014

The Sharing Economy

Inspired by these week's Econtalk podcast on the sharing economy (here) I can't help but think the ability for anyone to effectively regulate anything is really slipping away. 

The fundamental change that is occurring is that regulations are being made redundant 1) by people who find loopholes (that only work because of new technology) and 2) by systems that remove the need for people to rely on regulation and licenses to solve information asymmetry problems. 

Take Uber, for example, which facilitates cab services by connecting people who have cars with people who need to travel. In the past, government had a role in this business - namely, to ensure that getting into a stranger's car was something you would do. They accomplished this by solving what are known as adverse selection and moral hazard problems. Adverse selection is solved by doing background and criminal history checks, and ensuring drivers are licensed, insured, and legal. Moral hazard is solved by expensive licensing requirements which means a cab driver has a lot to lose if they treat customers poorly.  

Uber does a better job in both dimensions by 1) doing more detailed background checks and 2) refusing to allow anyone with a rating lower than 4.6 out of 5 to pick up passengers. This means that people who hail a Uber can be fairly confident (at least as confident as when taking a yellow cab) that they'll be treated well, both physically and financially.

Of course, even without Uber's fantastic system and software innovations there will always be loopholes. The best example of loophole mining is an app called MonkeyParking which has everyone in San Francisco hopping mad. In San Francisco the law specifically prohibits individuals and companies from "buying, selling or leasing public on‐street parking.” The app stays legal because it lets you pay someone to leave a parking spot. It's not selling you the spot, it's letting you pay someone else to go away. It's really quite genius. Think about it, how many times have you been in a movie theater and wished you could spend $5 to make someone go sit somewhere else? MonkeyParking is basically the same thing! 

Anyway, the sharing economy is here and the start-ups are winning because they are 1) better at what they do and 2) will find a way around regulations that want to slow them down. 

Applied Economists are going to have a field day with this stuff. 

Saturday, July 5, 2014

Just don't work at Hobby Lobby!

I'm sittting in sunny Centre, Alabama enjoying a great fourth of July with family at the moment. It would be even better if I didn't see so much hullabaloo about the Hobby Lobby contraception issue on the news and social media. The whole thing makes me incredibly sad, particularly because this is all happening around Independence Day!

For anyone not following the story, the Supreme Court of the United States decided that employers do not have to provide specific types of contraceptive coverage as part of their health benefit plans if those contraceptive methods are objectionable to their legitimate religious beliefs. Now, I'm going to say this loud and clear - I think it should be completely up to each individual to decide what to do with their own body. 

Sadly, many people have viewed the SCOTUS ruling as saying that Hobby Lobby gets to control their workers contraceptive options or that women's rights are being infringed upon. In fact, nothing could be further from the truth. The only issue the Supreme Court ruled on was whether the citizens of the United States had the right to force one group of people to pay for another's choices. They rightly decided that no one has that power.

Any worker who works at Hobby Lobby can walk into any clinic of their choice, and obtain a prescription or procedure for whatever contraceptive method they choose. Of course they will have to use their own money, but that's what people do when they want to buy food, gas, clothes, beer, and pay their mortgage. Why should this be any different?

Of course, they could also just not work at Hobby Lobby.

Cases like this make me even more certain that the link between employment and health insurance is detrimental to the social fabric of the nation and the economy as a whole. The amount of resources (time and money) that go into a non-event like this are shockingly wasteful. If only half the resources wasted went towards dismantling the employer provided health insurance system in the US, we'd be much better off. Wages would go up to compensate for lost benefits, and people could decide for themselves what to do with that money. Employers should have absolutely no say in what doctor you see or what procedures are covered and the only way to do that is to break the link between employment and health insurance.

However, in the mean time, forcing one group of people (the owners of businesses) to pay for the choices of another (their employees) should continue to be viewed as abhorrent and illegal.  


Friday, June 27, 2014

So who needs a minimum wage law?


Today, IKEA announced a significant pay rise for a large proportion of their employee base. Journalists at Slate and HuffPo were quick to beat the drum that this is good news, and it absolutely is for some workers. IKEA has decided, voluntarily, to offer higher wages because it helps them attract and retain the best workers. 

Where it all starts to go wrong in both reports is when the writers claim that "Ikea's move appears to be a powerful endorsement of a higher federal minimum wage." 

Actually, it's the opposite. This move shows that if businesses think it is best to pay higher wages they will do so. No wage legislation is needed. IKEA is literally announcing that a minimum wage as high as being proposed ($10 or more) would leave jobs only for the “best” workers while the rest search for work or seek assistance from state and federal government.

If all companies have to pay that wage, they’ll only hire the good workers. If they can’t find enough, then they’ll ask the existing ones to work more hours or  replace some jobs - that could exist at wages of $8 per hour - with machines. Just think of those touchscreen ordering machines at gas stations and then imagine a world filled with them. 

I’m reminded of my post from May 8th about unions running their own fast-food businesses:

[The ironic part about workers who campaign for $15 per hour for flipping burgers is that] any company who offered such high wages when their competitors do not will attract workers who would not work at the minimum wage. That is, the people who would end up working at such a company would be different to the people currently working at fast food restaurants.

Costco is the perfect example of this phenomenon in action. Costco is famed for paying good salaries, much higher than its main competitor Sam's Club. Anyone who has been to both stores can tell there is a not-so-subtle difference in the age, education, vocabulary, appearance, and demeanor of staff at the two warehouse clubs. If Sam's Club were to pay similar wages, over time, the type of worker who works at Sam's Club would change. The reason is simple, people respond to incentives. If Sam's Club pays $14 per hour to its workers, the type of people who apply for jobs there will be dramatically different than if they pay only minimum wage of $7.75. (Heck, I might consider it myself! Grad school stipends are not generous.)

If establishments like McDonalds chose or were forced to pay $15 per hour, the people who work there at the moment would probably lose their jobs. Yet, they can be seen campaigning loudly for regulations mandating higher wages. They may as well be asking to get fired.


I imagine IKEA will be the next place you’ll find a bunch of college graduates driving forklifts. If the minimum wage hike goes through, the college graduates will have more choices about where to work. However, those who a minimum wage hike is supposed to help will be left un- or under-employed, not better off.

Wednesday, June 18, 2014

What should economists do?

I've just finished listening, for the second time since Monday, to the excellent Bill Easterly on Econtalk. Easterly's book, The Tyranny of Experts, has jumped right to the top of my summer reading list. I would highly recommend listening to this podcast even if you are not an economist.

The specific topic under discussion in the podcast is top-down, expert-driven approaches to economic development. However, the solutions supplied could apply to expert-led intervention in any country. Easterly's main thesis has poignant relevance to economists in almost every field - we need to be much more humble.

The specific example returned to frequently in the interview is that of malaria-reducing bed-nets. I can't count the number of papers I have seen which examine the effect of bed-nets on malaria rates in Africa. Now, don't get me wrong, neither I nor any economist I know wants people to die from malaria. However, getting bed-nets to people in Africa is not an economic problem. It is a technical problem.

I think the logic of the experts/researchers goes something like this - economic growth is negatively correlated with poor health, malaria is a root cause of poor health, if we fix malaria, we will get economic development. The experts then secure funding to distribute bed-nets and go about doing so.

Now, even if they reach their intended recipients, these bed-nets are nothing but a Band-Aid that does not address the fundamental issue of why these people could not afford a bed-net in the first place. While the bed-nets don't do any harm, the money spent on the bed-nets might have been better spent on food, education, or clothing, and perhaps the individual who is given the bed-net may have made a better choice. Regardless, the experts fail to realize that the presence of resources such as bed-nets are the outcome of a growing economy and prosperous society and not really an input into them.

The economic problem and topic worthy of serious research should therefore be "why can these people not afford bed nets?". This is a much more difficult problem to tackle than "how much does it cost to reduce malaria by 25%?". Of course, that is why it matters.

In fact, everyone, and especially economists, should listen to this podcast. For economists, the podcast is an invitation to be much better at what we do. For the non-economist, it is a wonderful insight into what Economics is all about and the real tensions that are inherent in academic economic research.


Saturday, May 24, 2014

Ambling for Office

Reports from Local and European elections on the other side of the Atlantic are clogging up my Facebook news feed today. Candidates are being quoted as promising to work for the people and do this, that, and some other thing. Spare me, please.

Thankfully George Will at the Post (here) satirically brightened my day. My favorite passage from the piece;

[Presidential] candidates are constantly asked, ‘Where will you take the country?’ My answer is: ‘Nowhere.’ The country is not a parcel to be ‘taken’ anywhere.

Sure, the piece refers to American politics but the inebriating effects of political power transcend borders. If more politicians stayed within the bounds of the constraints given to them by citizens, the world would be a sunnier place and elections would be contested by candidates who instead promised to repeal this, undo that, and get rid of some other thing.

The key problem is, as always, one of knowledge. I have no doubt that many politicians believe what they do is "for the best." The problem is that they simply can't know what is best. No one can make other people's decisions as well as they can make them themselves.

Take recent healthcare laws, for example. The logic appears to me to be the following;

1. People don’t have stuff because it’s too expensive. Okay, so we’ll force them to have it.
*unintended consequences follow*
2. Ugh. The affordable stuff isn’t good enough. So let’s make a law saying the stuff has to be better stuff.
*unintended consequences follow*
3. Wait. For some reason the stuff is now even more expensive. Let's make a law saying it’s not allowed to be expensive.
*unintended consequences follow*

*flail*

4. But… but! Look what a caring person I am!”

I'm actually at the point where I think politicians should just be chosen at random. Like jury duty. If we let random juries decide on complex cases, and even matters of life or death, such a system might work pretty well for economic decisions, too. At least random, short lived political juries might care less about their political careers and business cronies.

Thursday, May 8, 2014

They call this the "market test."

Hamilton Nolan at Gawker media thinks unions should stop their whinin' and just run their own fast food restaurant. This utopia would forsake profits and pay wages that exceed the minimum wage to workers.

There are two major problems with such an idea. Firstly, if it was that easy to run a major food company and pay better wages, someone would do it. The fact that no one has succeeded at creating such a company is evidence it is likely not feasible to compete with McDonald's and Burger King and pay high wages. The market just doesn't support it.

Secondly - and this is the ironic part about workers who campaign for $15 per hour for flipping burgers - any company who offered such high wages when their competitors do not will attract workers who would not work at the minimum wage. That is, the people who would end up working at such a company would be different to the people currently working at fast food restaurants.

Costco is the perfect example of this phenomenon in action. Costco is famed for paying good salaries, much higher than its main competitor Sam's Club. Anyone who has been to both stores can tell there is a not-so-subtle difference in the age, education, vocabulary, appearance, and demeanor of staff at the two warehouse clubs. If Sam's Club were to pay similar wages, over time, the type of worker who works at Sam's Club would change. The reason is simple, people respond to incentives. If Sam's Club pays $14 per hour to its workers, the type of people who apply for jobs there will be dramatically different than if they pay only minimum wage of $7.75. (Heck, I might consider it myself! Grad school stipends are not generous.)

If establishments like McDonalds chose or were forced to pay $15 per hour, the people who work there at the moment would probably lose their jobs. Yet, they can be seen campaigning loudly for regulations mandating higher wages. They may as well be asking to get fired.

Hamilton Nolan's utopian fast food would suffer the same fate. It wouldn't help those currently working at fast food joints at all.