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Dmytri Kleiner: Bitcoin can’t serve the necessary Public Function of Money

photo of Michel Bauwens

Michel Bauwens
8th November 2012


Excerpted from Dmytri Kleiner (with whom I agree on this issue):

“I want to write a bit about the public function of money, especially as compared to the market function of money, in light of some of the recent discussion about Bitcoin.

Bitcoin is already a very useful technology due to the fact that it allows transactions to take place without any central authority. This alone is significant. The technology behind it is also perhaps applicable in other areas, such as the Namecoin project to replace the centralized Domain Name system.

Does Bitcoin have the potential to replace Government fiat money? No. It doesn’t. It only has the potential to be one commodity form within the money economy.
Countless books and papers have described money, money is a very complex thing which serves many functions. Keith Hart has written about the “Two Sides of the Coin,” heads on one side, tails on the other. One way to interpret this might be to contrast between the public function and the market function of money.

The origin of money is tribute. The source of money is the public, in whatever form, whether empire or democracy or something else, money is spent on public expenditure and demanded back as tribute. Whatever its commodity value, whether minted on gold, printed on paper or electrified as bits in a database, this sort of money has value because it can be used to fulfill tributary obligations, for example, it can be used to pay taxes. As the entire source of this money is government spending, the amount of this money is determined by the amount we want to provide on behalf of all as a society. This is the “Heads” side.

Not all economic activity is done for money. Much of it takes, and has historically taken, gift and kin-communal forms, where work and wealth is shared without specific prices for specific commodities, but rather on a basis of social trust and reciprocation. Markets emerge as economic activity extends beyond communal and neighbourly forms, markets extends the social to beyond the kin-communal, and along with such social distance come more transient relationships that can not rest on trust and reciprocation, and thus must be encompassed by spot transactions, and as a result specific prices for specific commodities and specific price relationships between commodities. With these transient relationships comes money. But this sort of money is different.

Commodities can also be traded directly, even if their relative worth is counted in “Heads” money, and trade can also be done on-account, by credit. The amount of which is not limited to the physical amount of “Heads” money in circulation. In the wider economy, money is endogenous, the amount of money circulating in the economy is not a function of any monetary base, but rather is a function of the amount of things we want to make and do for each other. More specifically, the amount we want to make and do for each other for money. This is the “Tails” side.

This is vertical money and horizontal money. Vertical money is created and destroyed by the public, horizontal money expands and contracts as a result of the economic activity of private individuals and their incorporated forms.

Money that has a commodity base, i.e. Gold, is not completely rooted in a particular public form, since it’s value can cross international borders.
This is where Bitcoin, a digital specie essentially, emerges as a new and rather unique form of money. It’s built-in cryptographic limits on supply make it essentially a virtual commodity form of money, fixed and “hard”, like Gold, yet digital and transferable electronically across global telecommunications networks. As such, it has attractive features as both means of exchange and store of value. Yet, while it certainly is useful on the “Tails” side of money, as one of the various kinds of assets circulating in the global market economy, it does not serve public function well. There is a reason that modern public forms of money are not commodities, why modern economies use “fiat” money, money that is not based in or guaranteed by conversion to any sort of commodity.

If the public restricts itself to commodity-money for public expenditure, this means that what it spends must be limited to what it taxes plus what it borrows, since commodities have a fixed available supply. And though many ignorant or simply disingenuous commentators, such as promoters of austerity, present this to be the case even now, in a modern monetary economy based upon fiat money issued by the public for public purpose, this is factually not the case.

The thing about public money is that we can have as much of it as we want to have. How much we spend relative to how much we tax is a public policy choice, and the right-wing dogma that the appropriate choice is for the budget to be balanced, for taxes to be equal to spending, is universally understood to be false, even among the most celebrated right-wing economists. In his 1948 article “A Monetary and Fiscal Framework for Economic Stability”, “Chicago Boys” patriarch Milton Friedman proposed a counter-cyclical policy, where government spending would be increased beyond taxation during economic downturns, similar to Abba Lerner’s “Functional Finance” which is often referred to as “Keynesian” economic policy. Whatever their ideological stripes, there is little disagreement among economists that to the degree that public budgets need to be balanced, they must be balanced relative to economic cycles and sectoral balances and not merely between annual public spending and taxation.

The balance between spending and taxes is simply the balance of the public “Heads” side of the coin, always in counter-balance with the private “Tails” side of the coin, as expressed by the activity of private interests in the global market.

It is no secret that the national State form is unsatisfactory. Not only is it burdened by its aristocratic roots, and not only is it corrupted by the fact that its modern form is largely captured by the international corporate elite, but the State is clearly unsatisfactory for modern publics as a result of the fact that static territorial forms are increasingly ineffective and inappropriate structures to serve global, distributed communities.

The public form has to evolve from the state form to the networked form, but for that to happen, new, networked public forms will need to emerge that are able to take over the socially necessary public functions. Including the management of forms of public money.

The critical feature required of public money is that we can socially determine how much of it there is, and how much of we want to apply to public purpose. We need ways to create and destroy public money so that we can can have a counter-balance to private activity, to manage cycles, to counter-balance economic sectors, and to socially pursue public objectives, such as health, education, and justice.

Thus, Bitcoin’s innovation in terms of creating a networked form of commodity money is not useful in creating networked forms of public money, and as a result it does not create a way for networked public forms to replace the current State forms.”

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12 Responses to “Dmytri Kleiner: Bitcoin can’t serve the necessary Public Function of Money”

  1. Tom Crowl Says:

    This guy understands and articulates this very confusing issue as well as anyone I’ve heard.

    Thanks for this!

    (And especially this sentence: “The public form has to evolve from the state form”… along with the paragraph that precedes it.)

    Self-Interest vs Altruism – Problems in Scaling the Decision Process
    http://culturalengineer.blogspot.com/2009/02/self-interest-vs-altruism-problems-in.html

  2. Mike Riddell Says:

    Tom i couldn’t agree more!

    A network of community currencies backed by the universality of time (time-banks plus) are i believe the answer to our socio-economic woes.

    Peace.

  3. Erik Voorhees Says:

    BitInstant’s response to Dmytri’s article… http://blog.bitinstant.com/blog/2012/11/9/response-to-dmytri-kleiner-on-the-origin-of-money.html

  4. Michel Bauwens Says:

    Hi Eric,

    I don’t think you have understood Kleiner’s key argument: that you can’t use Bitcoin for public policy and maintaining the ‘polis’, i.e. society, it can only function as a market currency. Public money essentially fiat (as is by the way, of course Bitcoin as well, it has no objective value, only the market value derivative of the trust of the community in the cryptographic production) and cannot be anything else. You should really read David Graeber’s book (Five Thousand Years of Debt) or even Zarlenga’s classic monetary history. Money does emphatically not derive from barter, but indeed originally from tribute. Historians and anthropologist have found zero evidence for the barter myth.

  5. Mike Riddell Says:

    In addition to Michel’s point, I’d like to ask Eric a question. It relates to this statement in his post:

    “A good money, then, merely needs to excel at the facilitation of exchange”

    Is this how you measure good?

    Do you seriously expect to make the world a better place by giving people-traffickers, drug-runners and arms-dealers an anonymous means to exchange their goods and services?

    And if that isn’t the purpose of Bitcoin, then what’s the point of Bitcoin?

    It’s fine for the shadow economy I guess – not my place to judge after all, but as a consumer I believe i have a moral responsibility. I’d prefer a currency that was backed by something abundant rather than something scare. In that sense, Bitcoin is no better than fiat money.

  6. Michel Bauwens Says:

    The libertarian critique of money implies that fiat money is bad because it is subjective, i.e. political; and that money needs an ‘objective’ support. But the Bitcoin support being immaterial code, it is worthless except for the trust of the community, and as it is designed for self-interest through its deflationary design making it increase in value, it also needs to be scarce to be subject to market dynamics of supply and demand. But though it can’t serve policy by determining its predetermined value, it is also in essence a fiat currency, created by the fiat of its creators, not an objective material value (such as gold or other commodities, some of which historically could actually be used by itself). Libertarian economist seem to fear most of all the arbitraryness of dictatorial powers that print money to suit their purposes, thereby debasing its value. But democratic governments with a social mandate may very well use it differently, for example for carrying out social or redistributive policies. I think David Graeber makes the point that most recent crisis of inflation were actually not the result of printing money, but of debt generated by the banks. In any case,the commodity approach behind Bitcoin makes any progressive social policy impossible, and leaves us stuck in highly unequal societies. This does not mean we should be opposed to Bitcoin, just wary of some of its supporters claim that it is a universal panacea.

  7. Mike Riddell Says:

    I wish I could articulate like you!

    :)

  8. Erik Voorhees Says:

    Michael – Bitcoin is not “fiat”. Fiat means “value by decree” and specifically refers to a money that has value because a government mandates its use. There is no mandate or government diktat behind Bitcoin, and it is thus not fiat.

    And I think you misunderstand my argument about money’s origin. Any item that becomes commonly traded for is de facto money. Cavemen who tend to trade for furs because they know that furs are easy to re-trade to another person are using furs as money. It is impossible for money to have originated from “tribute” when, at almost the very first instance of humans trading with each other, a money was created. Money is as old as exchange itself, and is not something separate which was “invented” whether by a State or anyone else.

    I don’t know what you could mean when you say “zero evidence was found for the barter myth”… are you suggesting that barter is a myth? If barter happened, money existed.

  9. Erik Voorhees Says:

    Mike Riddell – thanks for your question. You asked, “Do you seriously expect to make the world a better place by giving people-traffickers, drug-runners and arms-dealers an anonymous means to exchange their goods and services?”

    Yes I do, in the same way that Henry Ford made the world a better place by giving people-traffickers, drug-runners, and arms-dealers a much more efficient means of transportation and Alexander Graham Bell gave them a way to communicate across distances. Indeed, how much has the underground benefited from these inventions?

    Every great tool, by nature of being a great tool, will be used by good and bad people. It is a foolish policy to discourage the making of great tools, merely for the purpose of handicapping the bad guys.

  10. Erik Voorhees Says:

    Michael, to address your second comment. You said,

    “The libertarian critique of money implies that fiat money is bad because it is subjective, i.e. political; and that money needs an ‘objective’ support. But the Bitcoin support being immaterial code, it is worthless except for the trust of the community…”

    You misunderstand libertarians. Their critique of government fiat money is not that the value is “subjective” (indeed all value is subjective, even the value we place in “hard” assets like homes and gold – gold had no value before humans subjectively valued it). The critique is that people are coerced into using it, period. Libertarians are opposed to coercion, and thus the extent to which a populace is forced to use one specific money is the extent to which libertarians will be greatly antagonistic to it. The problem is made worse when the money we’re forced to use is debased by a privileged group of people. It’s absurdly immoral to force a man to use your money while you print more of it for yourself. You debase his property, you ruin the product of his labor, by your coercion.

    As Bitcoin is true free market money, nobody is forced to use it. It’s voluntary, and thus while some libertarians might think it’s silly or stupid or foolish to use it, they would not be opposed in principle to others voluntarily choosing to use it. It astounds me that so many people are vehemently opposed to monopolies, and yet they tolerate (even encourage!) a monopoly in the production of money itself. If monopolies are bad because they stifle competition, reduce consumer choice, and lead to “price gouging,” what possible justification is there to permit a monopoly on the most crucial good in an economy – the good called money.

    You also said,
    “In any case,the commodity approach behind Bitcoin makes any progressive social policy impossible, and leaves us stuck in highly unequal societies.”

    Well, if “progressive social policy” is impossible without the ability to print money to pay for things, then yes. Regarding equality, you probably shouldn’t pontificate about that when you have a thousand dollar computer and yet children are starving in the streets of Mumbai. Rationalize it however you wish – you choose, every day, to preserve the inequality between yourself and those poorer than you. Next time you enjoy a $20 meal at a restaurant, think of the starving children awaiting your donation.

    And indeed, if your interest is equality, how can you prefer a money system in which some privileged group of elites (banks and politicians) can print and receive the benefits of that newly printed money? What a terribly corrupt system we currently have… why do you defend it? Bitcoin gives no special privileges, to anyone, even if they call themselves the government. It is truly egalitarian money, and if only you’d awaken to that fact I think you’d discover why some of us are so excited about it and have dedicated our lives to building it.

  11. Mike Riddell Says:

    Erik I suppose you have a point about Bitcoin being a tool.

    My point is really about currency in general. Our planet is running out of resources – in my opinion because money the currency incentivises us and rewards us for using them up.

    I guess i’m looking for a currency that counter-balances the negative effects of money, and disappointed that Bitcoin isn’t it.

    There is a space for community and regional electronic currencies where trust networks add and create value and that’s where my efforts are going right now.

    Thanks for the healthy debate – we need some sort of forum or community group maybe?

    Mike.

  12. Erik Voorhees Says:

    Hey Mike,

    Not to disagree with you even further, but our planet isn’t running out of resources (though I know most people would call me crazy for saying that). Resources, properly understood, are productions of man. We produce trees (indeed there are more trees in America today than a hundred years ago, because we’ve made tree farms. Oil is indeed going to “run out” some day, but oil is not the resource… the resource is energy. We can (and will) find other sources of energy as the price of oil increases to become prohibitive. Indeed, at the beginning of the 19th century the world was worried about running out of coal.

    We make resources, and humanity tends to make more than it needs, and this is why living standards have increased. We are more materially comfortable today, we have more energy, more heat, more access to water, more food, etc than we did a hundred years ago, and this is amazingly true even though there are billions more people to sustain!

    But, let’s assume for a second that you’re correct and our resources are “running out”. Bitcoin, because it’s not inflationary, will be a disincentive on excessive spending. When you know your Bitcoins will be worth the same or likely more next month, you will not buy as much as you otherwise would. You will not consume as much, at the margins. Contrast this to the US dollar, which loses value each year, and thus encourages excess consumption, excess spending.

    So, nobody should think Bitcoin is perfect, but for your specific purpose of curbing some degree of excessive human consumption, Bitcoin is a better alternative money than fiat currencies like USD.

    And there is a forum! bitcointalk.org

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