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The libertarian background to the deflationary design of Bitcoin

photo of Michel Bauwens

Michel Bauwens
12th October 2012

Some may not like it, but bitcoin is a Mengerian-, Misean-, Rothbardian-, Austrian-currency in its purest form. Still actively debated within the Austrian economics community. – Jon Matonis

Excerpted from Phillip Pilkington:

“The most popular aspect of the libertarian doctrine today is probably the idea that deflation is not such a bad thing – indeed, it may even be a morally purifying cure. Uncomfortable – like a cold shower – but necessary to rid a gluttonous populace of its worst excesses.

The economic argument among actual libertarians for this view runs broadly that prices in a competitive economy should generally be tending downwards rather than upwards. The rational argument – as is typical of extremist ideologies – for the most part masks a more deeply embedded emotional appeal. Simply put, the argument plays to the hoarding impulse so prevalent among gold-bugs, who appear to overlap strongly with libertarians.

While it would be too much of a distraction to go into the origin of the compulsive hoarding impulse here, it should simply be noted that among right-wing libertarians it is often mixed up with saving. Not only are these two distinct concepts within the sphere of economics – hoarding being a removal of wealth from circulation and saving being the deployment of present wealth to procure future wealth – but they are generally recognised as distinct concepts in psychology, both popular and medical. Even children can distinguish between Scrooge and true capitalists.

The argument for deflation appeals to the idea that the saver – who is seen as the origin of wealth and production by the libertarian – benefits because the money that they have saved becomes worth more. But, of course, this is not true of the productive capitalist whose fixed capital investments depreciate rapidly as they lie unemployed. It is only true of the hoarder, the gold bug and the miser who removes wealth from circulation or transfers it into useless fetish-objects and sits upon it until he acquires more purchasing power.

In order to get around this inconvenient fact the libertarian supplements their argument by saying that all investments that fall as the deflation tears the economy apart were merely “malinvestments” made at a time when money was too cheap. It is thus that the wanton destruction of societal wealth is justified as a sort of Judgement Day. Those who go bankrupt are simply sinners. Thus the fact that deflationary conditions wreak havoc on all those in the economy that are not unproductive hoarders is veneered over through a moral appeal to the supposed quality of outstanding investments.

Tied to this is the idea that production that does take place in a deflationary environment is morally pure. It is seen as “lean and mean” in that it requires real effort on behalf of the investor to accomplish, this in contrast to the “profligate” investment decisions that might be made when money is easy to come by. In a deflationary environment the men, as it were, are sorted from the boys. This crass notion ignores many aspects of how modern economies actually operate; for example, the fact that monopolies, oligopolies and giant corporations will find it far easier to weather a serious recession or depression than a smaller firm simply due to size and outstanding credit relations. But it is an argument that is made nevertheless because it appeals to a sense of moral righteousness and rewards the libertarian’s anti-social hoarding tendencies.

It is here that nostalgia rears its head. Libertarians often hold the 19th century up as a sort of model for what the present should be. Unlike extremist left-wing ideologies, like Communism, libertarianism is backward rather than forward-looking. Where Communism projects into the future a mythic ideal, libertarianism mourns over an ideal past that has supposedly been lost. (Would it surprise the reader to learn that the hoarding impulse is thought to be tied to fantasies of the womb?)

For the right-wing libertarian the 19th century is the era of a true capitalism with little or no government intervention. Indeed, even warfare was limited and required little government meddling. Yes, this era was unstable – even the libertarian would not deny that – but this instability gave rise to a dynamism and a freedom that was crushed in the “statist” 20th century.

But it is not the inflationary era of high liberalism that is often looked back upon through rose-tinted glasses, but the deflationary era of the third quarter of the 19th century. This would be unusual if we did not already understand the motivations for the libertarian argument for deflation. The right-wing libertarian needs an era that was both non-inflationary and at the same time one of “free” competition as a screen on which to project their utopian fantasies. But, as we shall see, in this they are trying to have their cake and eat it.


The most peculiar aspect of the argument favouring this deflationary period is that it completely ignores the broader historical picture. The libertarians, hiding as they are in the trees, completely fail to take notice of the woods all around them. For it is widely recognised by historians that this was the era when laissez faire capitalism fell and the ground was cleared for a new era characterised by government intervention, monopoly men and imperial conquest. As the great British historian Eric Hobsbawm put it in his ‘The Age of Capital’:

- The new era which follows the age of liberal triumph was to be very different. Economically it was to move away rapidly from unrestrained competitive private enterprise, government abstention from interference and what the Germans called ‘Manchesterismus’ (the free trade orthodoxy of Victorian Britain), to large industrial corporations (cartels, trusts, monopolies), to very considerable government interference, to very different orthodoxies of policy, though not necessarily of economic theory. The age of individualism ended in 1870, complained British lawyer A.V. Dicey, the age of ‘collectivism’ began. (P. 354)

Or again:

- A new era of history, political as well as economic, opens with the depression of the 1870s. [This era] undermined or destroyed the foundations of mid-nineteenth-century liberalism which appeared to have been so firmly established. The period from the late 1840s to the mid-1970s proved not so much, as the conventional wisdom of the time held, the model of economic growth, political development, intellectual progress and cultural achievement, which would persist, no doubt with suitable improvements, into the indefinite future, but rather a special kind of interlude. (P. 63)

This new era was to be one in which trade unions grew to become a serious force while the first true wave of corporate mergers would establish a new monopoly or oligopoly structure for the capitalist system. It was also an era in which the government would begin to play an increasingly large role in economic affairs. The foundations would thus be laid for the state capitalist systems of the 20th century – the very systems that the libertarians decry – not to mention for the rise of socialism.

Indeed, when the lifeblood of cheap money had run out the era of high liberalism ground to a halt and economic forces began to become increasingly concentrated. This is no coincidence. But nevertheless right-wingers today continue to fool themselves into believing that austerity and deflation rather than easy money and credit are the path back to some sort of purified capitalism. They are no such thing. For the libertarian right-wingers are chasing an historical ghost – a ghost that never existed in corporeal form and so one that they have no chance of resurrecting. In clinging to these crude ideological notions and historical myths it is their own ability to engage in practical politics that they bury – and those politicians who embrace their creed will not last long.”


18 Responses to “The libertarian background to the deflationary design of Bitcoin”

  1. Peter Surda Says:

    You should have been at my presentation at the Bitcoin Conference in London where I debunked the scaremongering against “deflation”.

    You conflate cyclical decreases in the quantity of money (depressions) with secular decreases in the price level (inelastic money supply) by calling both deflation. They are two different phenomena.

    Also you mix ideology with economy.

  2. Michael Suede Says:

    Apparently this guy is unfamiliar with the Austrian School of economic thought, or the fact that Hayek won the Nobel Prize in Economics. According to this guy, Hayek, Mises, Menger, etc.. etc.. are all “extremists” for believing in sound money.

    This article is a classic example of what happens when people with journalism degrees try to write about subjects they know absolutely nothing about.

  3. Layne Anderson Says:

    I’ll take my $250 gold coins, a 12 year investment, and cash them in for $1800.

    One sentence just completely destroys your Page long rant

  4. Michel Bauwens Says:

    on the contrary Layne, it actually confirms it! since the article specifically refers to the hoarding impulse; your making money with money, good for you, but it does nothing in terms of creating ‘real’ value, except of course the very real immaterial happiness of seeing your assets grow; but studies show that effect is limited, i.e. after a treshold, having more no longer contributes to happiness.


  5. Janmes Wilson Says:

    Michel, Im afraid you dont yet have a good understanding of economics. Money does not exist to, “contribute to happiness” if you really believe this, you are conflating Catallactics with economics, and its clear that you need to do some reading. The Austrian School is the only school of thought that will allow you to understand economics correctly. Michael Suede’s list of academics should be your first port of call.

    The money supply in Bitcoin is fixed, just as it is with gold (the supply of which increases only very slowly, which for all intents and purposes makes it fixed). This is not a bad thing, it is a very good thing. It means that no one can increase the supply of money and steal the value of your Bitcoin from you. Anyone who really cares about the welfare of their fellow man understands that this is a good thing, and that the supply of money should not be controlled by a small group of men, no matter how they come to gain control.

    Bitcoin is unmistakably pro human, anti-State and Libertarian in its design, and there is no getting away from this. The fact that Bernandke, the Federal Reserve Chairman is mocked directly in the Blockchain is unambiguous evidence of the thinking and philosophy of Satoshi. If you really want to understand Bitcoin, you need to become fluent in economics, and that means the Austrian school. You cannot claim that other schools are “also valid”, or “have something to say”; they are not valid, and they are wrong, just as alchemy is not chemistry.

    Im glad that you are slowly abandoning your Socialism and moving towards Libertarianism. Its going to be a hard struggle for you, but possession of the truth is worth the effort.

  6. Henry Brade Says:

    The fact that Layne’s “investment” grew in value is mostly because the paper monies in the economies around gold shrinked in value. Gold is an asset that can’t be thought of in a vacuum (rarely anything can). It’s strongly affected by the inflationary tendencies of paper monies.

    I personally can’t understand this article. Why someone would voluntary hold money that shrinks in value is beyond me, and I claim that they actually wouldn’t. That’s why we have a non-voluntary monetary system. Every libertarian is against non-voluntary monetary systems regardless of their properties.

    We have this new phenomenon called cryptocurrencies and they are by definition 100% voluntary. The creator of Bitcoin understood the requirements for voluntary money very well. It has to be sound money which means that it’s limited and scarce. This is because people don’t want to voluntarily hold money that melts in their possession.

    In fact Bitcoin has fewer elastic properties than gold has, it even makes fractional reserve banking much more difficult and limited compared to gold, and bitcoins have a max limit, gold really doesn’t. So it is truly sound money in its purest form.

    I like Bitcoin for many reasons and the economic model it uses is one of the biggest. The notion of central planning our monetary supply is a total failure. Controlled inflation leads to cheap credit which leads to constant malinvestments and credit bubbles. Inflation is also a constant tax from those who save money (for future consumption) to those who take advantage of cheap credit.

    I believe the economic properties of Bitcoin is one of the main reasons why it has grown as much as it has. Holding bitcoins creates an incentive to develop services that help the economy grow because everything that grows the economy is likely to cause increases in the value of bitcoins. So one could have a Bitcoin business that not only profits directly from the business, the investments into bitcoins could soar as well.

    Finally, I believe that promoting consumption is absolute lunacy. It’s against rationality and sustainability. Bitcoin is technically neither an inflationary or deflationary currency (since the money supply is eventually fixed). Prices in a Bitcoin economy are going to be deflationary if there is growth, but wouldn’t it be a healthy consequence of growth to have lower prices? Prices should have a tendency to go down if the economy is healthy, if it’s not healthy they might even go up which is bad.

    Hoarding is not bad. Hoarding is actually a hell of a lot better than consumption. Consumption consumes natural resources which shouldn’t be wasted unless really needed. An inflationary economy promotes consumption over savings which leads to more resource consumption, more debt crises, credit bubbles etc. Even studies on human happiness have proved that being able to save even a little from monthly income leads to greater happiness.

    A monetary system which doesn’t encourage consumption is badly needed. That is the only way to solve the debt problems. The only real way to handle the credit bubbles. It will also start creating real wealth through real savings and savings based investments. It will also help us with sustainability which is not a problem that should be overlooked, current human consumption patterns on this planet are very far from sustainable.

  7. Sean Says:

    “But, of course, this is not true of the productive capitalist whose fixed capital investments depreciate rapidly as they lie unemployed. It is only true of the hoarder, the gold bug and the miser who removes wealth from circulation or transfers it into useless fetish-objects and sits upon it until he acquires more purchasing power.”

    You seem to be confusing productive investments with savings. You cannot have productive capital investments without savings (or as you like to call it hoarding). You can take out a loan and deploy those savings to productive investments, but the investment cannot occur without first saving. An interest rate on a loan is the cost of money. This acts as a natural regulator of savings. If savings are low, interests rates will be higher – encouraging more saving that can be eventually deployed to capital investments. If savings are high, there will be less incentive to save (through lower interest rates) and more incentive to deploy the savings to capital investments.

  8. Rune K. Svendsen Says:

    As other have mentioned, there is actually a very good reason that “hoarding”, as you describe it, is not at all detrimental to an economy – in fact it’s the exact opposite.

    Hoarding (deferring consumption) is necessary for an economy to evolve. If the early man didn’t find a way to conserve food and hoard it (save it), he would have never had time to improve his hunting techniques by inventing spears and the bow and arrow, because he would need to constantly hunt or else he would starve to death. Savings enable participants in an economy to divert their attention from satisfying immediate needs, and allow them to focus on improving the tools they have available for satisfying these needs.

    If, for example, a society wants to build a sewer system, how does it employ the hundreds of men needed to build this without them starving to death? The answer is through savings. The society needs to build up a stock of consumption goods intended for future consumption. The workers can then use up this stock of savings while building the sewer system. If there are enough savings for the men to finish building the sewer system, they will finish it and can then return to producing goods for immediate consumption afterwards. But now, unlike before, they will be more effective at producing goods because they now have a sewer system. There will be fewer illnesses, so people can work more effectively.

    If the men start building the sewer system and, at some point along the way, find out that they hadn’t built up enough savings to finish the project, they will have to abort it and start producing consumption goods again, in order to survive. This is essentially what happens when central banks lower the interest rate, and increase the production of money: they make it appear that more savings are available than really is the case. Projects will be started that – at some point along the way – will be unable to be completed because the amount of savings that appeared to be available (because of the production of extra money) wasn’t there after all. It’s the equivalent of the sewer-workers starting to build the sewer because it looks like their supply of food is sufficient, only to find out that someone had gone around and replaced their stash of potatoes with twice as many potatoes with only half the energy content.

    The people who went around and did this argued that it was beneficial because it was evident that when they did this the economy did well: people started building things and everybody was employed. What they didn’t realize was that they were only helping the society start up investment projects that would never complete.

  9. Dusty Says:

    @Michel: It’s a pity you are not educated in economics, but it’s very simple to test if your beliefs are correct.

    Bitcoin is opensource: just create another chain with different rules (for example without the hard limit on coins), and let the users of all the world choose which one to use.

    In a few years we’ll see which one will be the most accepted, if Bitcoin or your chain.

    And maybe in the mean time you’ll understand why a good medium of exchange (i.e.: money) is better if limited in supply ;-)

  10. Michel Bauwens Says:

    Unfortunately, the argument that one is not educated in economics seems to come from austrian-libertarian economics; and those seem to believe there is only one kind of economics, theirs. For alternative views; see Michael Hudson, Steve Keen, Bernard Lietaer, Margrit Kennedy. MMT, etc … Better yet is a simple course in human history to see the wide variety of rules concerning money and currency; including money with negative interest rates (the longest lasting form); sufficiency based systems (instead of scarcity based). By the way; who is arguing for a unlimited supply of money? I think the question is rather, how the supply should be regulated.

  11. Peter Šurda Says:

    Even if the the non-austrians were correct about “deflationary spiral”, in particular the monetarists, their theories only apply to systems with elastic money supplies (i.e. the spiral refers to an escalating credit contraction situation, in particular as a part of the credit cycle). They don’t apply to Bitcoin since it has an inelastic supply and most likely credit will have no effect on the money supply (and thus there will most likely also not be any credit cycle). But even if it did, at the latest the “deflationary spiral” must end when 100% reserves are re-established.

    I’m not an expert in non-Austrian schools but I am not ignorant of them either.

  12. Peter Šurda Says:

    Also the traditional “deflationary spiral” argument assumes that the only liquid instrument is money, which is so far removed from reality that it can be safely ignored.

  13. Dusty Says:

    There are two kind of economic theories: the ones that describes economics and are able to predict without any intervention, and the ones that try to impose certain rules to the market with a goal, failing.

    Which are which ones is left as en exercise to the reader :)

    In the mean time, Michel, are you willing to take the challenge I proposed you?

  14. Peter Šurda Says:

    I posted a point by point rebuttal on my blog.

  15. Michel Bauwens Says:

    Can you remind me what that challenge was?


  16. Dusty Says:

    There are a number of monetarist theories, let’s put them to test!
    Fork bitcoin and create a blockchain with the rule you (or others) think are the best one.
    Or even better, create one different version of bitcoin (and related blockchain) for each of these theories, and let people choose whatever they think is the best.
    (Let’s remember that Bitcoin is voluntary, nobody forces you to use it).

    Wait some time and we will see which one between Bitcoin (that perfectly incarnates the properties of an inelastic money supply as defined by Austrian Economics) or one of the other you created will succeed.

    The results should be interesting, do you agree?

  17. Michel Bauwens Says:

    I have called for this in the past, let’s see whether people with technical acumen, will indeed go for it,


  18. kewlkoin Says:

    As the refrain goes: “There is to much confusion here, …”, so I´ll just point out one thing. There is no such thing as a Nobel Prize in Economics. It´s actually called “The Swedish Reichbank´s Prize in Economic Science”. Economy? A science!? Yeah, right!

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