Thursday 5PM
Two economists walk into a bar. A big sign out front says, “Happy Hour! Half off for all drinks except top shelf whiskies.” One of the economists, a Mr. Keynes, clearly looks disturbed. He worries that a 50% discount is a sure sign of financial distress and intervention is the only sensible solution. Keynes buys a full bottle of top shelf whiskey and puts on his credit card. The other economist, a Mr. Hayek smiles, seemingly realizing that this price dislocation can't last for long and he better take advantage of it. So what does he do? He orders two half-price beers and pays with Bitcoin.
Move over Keynes and Friedman-the Austrians are coming back
Keynesian economics has been one of several schools of the economic and financial thought leadership over the last century . Centered around Jonathan Maynard Keynes, these economic principles believe in the role of central banks and governments to induce economic behavior by controlling money supply through interest rates. Keynesian economics lost some of its influence in the 1970s pressured by economic unrest of stagflation and a new school of thought called Monetarism which was championed by Milton Friedman*. Monetarists believe in controlling the supply of money as a way to keep price stability. Anyone who has taken a econ 101 class has been exposed to several different theories which mostly conclude to having a central authority to manipulate the supply/demand equilibrium to try to get the optimum output or desired result. Less renowned and often glossed over, is the Austrian Economic school of thought. While it's existed for much longer, it remains much smaller, arguably less renowned and certainly less followed. However, Austrian economics has seen a resurgence and large growth over the last 10 years as the world recovers from the worst economic times since the great depression. The Reliance on central banks to control interest rates, Austrians would argue ,has caused greater dislocations in the market place. Austrians also believe in market forces to correct themselves towards an equilibrium and that these cycles are shorter and less extreme when left to auto-correct.
Rise of decentralization
Keynesian and Monetarism have dominated economics and central bank thinking since the second world war. It is fair to suggest that they have been extremely successfully in helping bring economic expansion and improving the quality of life. However we have seen great boom/bust scenarios and arguably a greater amount of wealth inequality than ever. The last boom/bust scenario brought on the "great Recession" which led many to question some of previous and prevailing ideas of economics. This economic crisis and the response of sovereign/central banks to this, has brought about much distrust of central banks and a simmering move of looking for a better way. From the crisis rose" occupy wall street" and a distrust of institutions like banks, the media and government rule of law. One interesting and possibly seminal response was Satoshi Nakamoto's (anonymous creator of Bitcoin) white paper on peer to peer transactions and a decentralized currency without a sovereign backing. In fact, I believe you could argue the phoenix from the crisis is Bitcoin, blockchain and decentralized ledgers as a way reduce the dependence of middlemen such as banks and the influence of central banks. We have also seem a rise in interest in the Austrian economic school of thought whose principles align with decentralization and yes, perhaps even an alternative, mathematically based form of fiat.
What does this mean if you’re not an economist?
Most people carry on with their daily lives without much worry over economic schools of thought. However, their buying power in a local currency is arguably their biggest issue day-to-day ,especially if those people are living in less developed countries. Throughout history, fiat currencies have suffered over time from severe devaluation. Even the US dollar, has lost 90 percent of its value over the last century while it’s functioned as the currency of international trade. Meanwhile, central banks continue to explode their balance sheets while sovereign treasuries around the world continue to print money, which in turn, puts further pressure on currencies. 70 percent of the worlds GDP is at zero or negative interest rates and more debt will likely be issued by sovereigns at these low levels. No matter which school of thought you adhere to, you’d be hard pressed to find an economist who believes this sort of thing is sustainable. If you’re in doubt, just ask a Venezuelan.
Technology and Economic crisis leads to change
Computing power along with encryption has brought about about the possibility of new solutions to economics. Cryptography has been around since the ancient Greeks and cryptography in machines was pioneered by Alan Turing during WWII. Forty years ago Fredrich Von Hayek of the Austrian economic school wrote about denationalized and decentralized forms of currency to compete with fiats. In the 90's Monetarist economist and free marketer Milton Friedman predicted "e cash" and internet transfer of payments. One could argue Hayek and Friedman not only had foresight, they may have come to the same conclusion given time. The good news is, the advancement of technology and computing power has made these ideas possible Like the beginning of all great movements, more than just one catalyst was needed. The means to make it happen–in this case technology in the form of computing power–and a catalyst, the great recession of 2008, created the perfect storm. Perhaps we are finally at the confluence of a desire for a decentralized, transparent market based approach and the technology to support it. And perhaps that new economic system of measure is best theorized in Austrian economics.
And that’s why when two economists with opposing monetary views walk into a bar, it’s never going to just be about drinking.**
* Keynes basically looks for the central role of government policy to drive demand side while Monetarist believe in manipulating money supply for price stability.
** I write this as a feedback loop and always appreciate any opinions and thoughts. My intention here is not to get into any deep analysis of economic theories but on the role that technology may also be influencing the way economic policy may look evolve in the future.