The Concept of “Pure Money”

Recently I read about Alan Greenspan’s comments about Bitcoin to the effect that it’s nothing but a bubble phenomenon. Crypto-currencies are a bubble because these things have no “backing”.

What Alan fails to understand (and what I failed to understand back in 2011) is that money does not need backing. It used to be that fiat money was indeed backed by the government that issued it. It used to be backed by gold, and gold has its natural value as metal. Nowadays, which country can claim that its fiat currency is backed by gold? In reality, fiat currencies are just like any crypto-currency in this regard: no backing.

Ludwig von Mises, in his magnum opus, “The Theory of Money and Credit” teaches that there are two important components in the value of money: its natural use value (i.e., gold *as* metal), and its value when used as a medium of exchange. When gold deflates, its natural value diminishes with respect to its value as medium of exchange. When it inflates, its value as money can decrease to the point that people start using it more for filling teeth and as conductors in integrated circuits.

Crypto-currencies have no natural use value. Crypto-currencies are just numbers stored in their respective networks. They’re not worth anything. They have no “backing”. It does not mean however, that they have no money value. In fact, they are very useful as media of exchange. And therein lies their value: Crypto-currencies are a form of “pure money”.

It’s interesting to note that Ludwig von Mises himself did not conceptualize such “pure money” to be possible. I can’t blame him because computers and the internet have not come of age in his time. I do fault Alan Greenspan, though, for not understanding what crypto-currencies are. I expect more from him because he used to be the Fed Chairman.

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Total Market Breakdown

It took a couple of days after typhoon Yolanda has left for people to realize how devastating she has been. The hardest hit was the island of Leyte in which more than a thousand dead have been recovered, and the casualty count is still climbing as more dead bodies are found. This morning I tried to explain to my nine and ten year old how it is like to survive the typhoon itself in that island. I asked them to imagine that we were in that island right now, and that we all survived, in spite of what happened there.

My wife objected to the scenario I was painting: “But don’t you think we would have flown to the island of Mindanao or even to Manila even before Yolanda struck?”

“Remember that we here in Cebu City got the same warning”, I explained. “We got the same Storm Signal #4 as Leyte. Why did we decide to stay? The fact is that there was no way to predict how hard Yolanda would hit any one island. The inhabitants of Leyte stayed, just as we would had we lived there. The path she took was not exactly as predicted because predictions are just that, predictions. The path you saw drawn on TV in vivid colors before she hit any island was a probability map, not an accurate navigational map of a ship. We need to understand that.” She nodded her head in agreement.

Let’s imagine we are in that island right now. I want to paint a picture how horrible it would be, how difficult it is to keep surviving in a situation where there is nothing you can buy, and there is total market breakdown, for that is one after-effect of a calamity, total market breakdown.

In the morning after the typhoon, we find the ground floor of our apartment filled with mud. There is no electricity, and so we try to save as much food as we can from the refrigerator. We realize that by tomorrow, we will be out of food and water, and so our first instinct is to go buy food at the nearby grocery. But one of our neighbors tells us that she had gone there, and the neighborhood grocery is all in shambles. People have looted whatever was left, and there was absolutely nothing to pick up, much less buy, by the time she got there in the early morning light. It does not take long for us to realize that the same fate has befallen all groceries in the city. We hear on the radio how a big grocery store was attacked by swarms of hungry people. The lone guard attempted to control the crowd, only to be killed himself. We can only imagine how his family is now suffering in his absence.

We need to decide what to do. Our prime objective is to get food and water. How? Our car still has some fuel left. May be we can drive to where there may be some food left. However, we hear on the radio that the whole island is devastated, and we can easily run out of fuel in the middle of nowhere looking for food and water. We decide to stay put. We cannot do anything but pray. In the evening, even starting the fire for cooking is not easy. We find out that our cooking gas fuel tank is empty. We gather wet twigs and branches to start a fire.

In the following couple of days, we start to feel the pangs of hunger. The kids are crying all the time. We start to smell this terrible stench of dead bodies still uncollected. There are dead cats and dogs all over the city, not to mention dead human bodies still undiscovered in some crevices and abandoned houses. Why is it taking so long for the rescuers to reach us, we wonder. I suggest that we start thinking about catching mice that somehow start to proliferate everywhere. I ask our maid whether she knows how to cook freshly caught mouse. She grimaces and says she will never cook a mouse, much less eat it.

Pre-Calamity Functioning Market

Indeed, why is it that help is always slow to arrive in any calamity? Before the calamity, when everything is normal, we take for granted so many things around us: businesses that literally put food on our table. We forget that when we go to the grocery, food does not just get there on the shelves for us to pick up, but that is what it seems. We don’t realize the sheer number of people involved to get all kinds of food on the grovery shelves. Early in the morning on any normal day, trucks would arrive at the grocery to deliver both perishable produce and packaged goods. Every food item is delivered from somewhere else, may be middle men who have boght the items from some other supplier, may be farmers. Imagine the number of people involved to produce each item. How does it all happen? How do the producers know exactly what kind of item to produce, and how can they get their produce to the market on time? How do the distributors and middlemen organize themselves so that every item is delivered and distributed to all grocery stores on a daily basis?

In a functioning market, there is nobody coordinating the truckers, the distributors, the middlemen, and the producers. It’s all based on the idea that each one of these market participants are in it for the money. The better each one of these participants serve their markets, the more profits they get. By its very nature, the market rewards those who can deliver food from the farmer to the consumer in the most efficient manner. How does this happen, as if by magic? Each one of us participates in this phenomenon: by simply choosing to buy the best that our money can buy at the grocery on a daily basis, by doing so we reward those who can deliver the best product for the least cost. The price of each item in the market serves as a signal, a feedback to the producer, how much of it to produce.

Helping Is Not Easy, and Neither is it Simple

When a calamity like typhoon Yolanda hits the islands, we get a taste of how it is like to live without the market. We cannot expect goods to be delivered as efficiently. People think that giving is all that is involved in helping. I take my family to a donation center and donate food and water. I remind them how complicated and difficult it is to deliver and distribute what we just donated to the victims. In order for every donation item to get to its intended recipient, think of all the logistics and planning that has to happen first before such endeavor can even begin. What you are doing is basically substituting a hierarchical logistical system for the most efficient delivery and distribution system a market can provide. The substitute system will have to be centrally planned and coordinated. If not, you may miss an area and the consequences would be severe for that area. Or you can simply deliver the wrong goods to the wrong place. People would greatly suffer while a vast quantity of food can lay rotting in some storage building. No wonder you need a regimented, obey-all-detailed-commands type of organization like an army to replace all the logistics of a well-oiled market.

A news item relates that PNoy walked out of an organizational meeting out of frustration. We complain about the inefficiency and think that PNoy as president should get down and dirty to get it all done. It’s not that simple. It’s more like formulating a strategy for war than anything else. There are strong disagreements among the different government agencies. Any meeting to formulate strategy can easily turn into a shouting match. None of those C-130s would be of any help if you don’t have the goods all ready to be delivered. None of those hundreds of millions of dollars donated by other countries would be of any help if an agreement cannot be reached how best to use them. I am sure that, given the climate of mistrust of government right now, none of PNoy’s more reputable cabinet members would want to handle such large amounts of money. It is a political hot potato.

I Propose an Emergency “Market”

To the degree that the authorities suppress the market, hunger and starvation on a mass scale can occur. The most efficient organizations, like the Red Cross, are huge, well-managed organizations. Executives of these organizations are skilled in running such big organizations, especially during an emergency. These skills require a market, and indeed these organization reward their leaders well. Some of us think that these people should not be so rewarded, thereby killing the market for organizational talent in these big organizations. If this happens, and organizational skills become lacking in charitable organizations, hunger and starvation can happen in the time it takes to distribute food and water.

Our instinct is to reward charitable people and punish the profit seekers, especially during a calamity. Such instinct is nt necessarily beneficial. For example, we have laws that punish “profiteering” or “price gouging” during a calamity. Our Christian instincts lead us to promulgate such laws. My opinion is that such laws can be very harmful. Imagine, again, being in Leyte right now. What you need is food more than anything else, because you happen to have a large tank full of rain-water in your backyard. How can the authorities know this fact? They have no way of knowing that you need food more than anything else. Or may be what you need most of all is medical supplies because your wife is badly bruised and just need some ointment to heal the wound and prevent infection. There is no way that the authorities can know all of these circumstances for every family. No way. So you would be very lucky to receive exactly what you need in a centrally planned distribution system.

Now imagine that instead of delivering goods outright, the authorities focus on establishing an emergency market. Prices are not controlled, and profiteering is not prohibited in any way. Money is then distributed, instead of goods. It is easier to distribute money than goods: in the worst-case scenario, a charitable organization can just distribute money by throwing bills in the air from a helicopter. People can then buy goods from a market that will find its way among the ruins to deliver. Calamity victims would then decide, based on their individual circumstances, what to buy from the emergency market. Those businesses that deliver first to the hardest-hit location will be rewarded. Of course, charitable distribution systems would still be allowed, to ensure that those not strong enough to even pick up money dropped from helicopters are taken cared of. I am not claiming that such a system would prevent horrible tragedies, but I do claim that the current system of total market breakdown is more catastrophic in terms of the sheer number of people dying because they did not receive exactly what they needed.

Posted in Money and Economics, News and politics | 2 Comments

The Future is Here, and It’s Wonderful

This is an illustration of what it’s going to be like when Bitcoin or something like it becomes more dominant than any fiat currency.

At the end of every month, from work you get paid in Bitcoins, say 100 miniBits. (A miniBit is one-thousandth of a Bitcoin, a microBit is one-milionth.) That money doesn’t get “directly deposited” in a bank. The Bitcoin infrastructure does not need banks. Instead, that money gets “deposited” by your company directly to your Bitcoin account. So on the first day of the following month, you check your account by opening a simple app on your smartphone, and verify that indeed, 100 miniBits have been deposited. (To simplify the illustration, let’s omit taxes and other possible monthly deductions.)

You work mostly from home, driving to the company office only when there is a meeting. Just before leaving for a meeting, your wife asks whether you can drop by the grocery store. Sure, you say, and asks her to send you the grocery list in a text message later, preferably after the meeting so you are also reminded by her message. The text message has the following list, together with maximum prices beyond which she instructs you not to pay, but instead to drive to another store for those.

One ten-kilo bag of rice – 25 microBits
Two kilos of Tilapia fish – 135 microBits
One small bag of ground coffee – 5 microBits
One dozen eggs – 12 microBits
One liter of milk – 23 microBits

The total being 200 microBits. As you enter the grocery store, the Bitcoin program in your smartphone detects that you are in a business establishment, and automatically gets ready for any payment you may make to the Bitcoin receivable account number of that establishment. It does that whenever you are in the vicinity of any store registered with the Bitcoin network, just in case you decide to buy anything.

You pick up the items one by one, and as you pick up each one, an RFID detector on your smartphone identifies what you pick up, prompting the Bitcoin paying program to ask you for permission to pay. The Tilapia item costs 140 microBits, but you tell your smartphone to pay it anyway. As soon as you say “Yes, pay”, the Bitcoin program credits the grocery account 140 microBits. One liter of milk costs 18 microBits today, so the total comes out to the same, 200 microBits.

No check-out counters! As you head out of the store, your smartphone flashes an image of your receipt. You take a glance, thinking how wonderful it is that by now your wife has received an email with a copy of the same receipt.

All those credit cards in your wallet are gone. In fact, you don’t need a physical wallet anymore. Your smartphone serves both purposes now, including a hundred others.

All of the above will be visible to users of the Bitcoin infrastructure. What is not visible is the tremendous benefit we will all gain from a system that is NOT under any centralized control. No central banks to decide how much Bitcoins should be worth! We all decide ourselves how much each item we buy is worth, in terms of Bitcoins. All these billions of decisions every second, in turn, determine also the value of every Bitcoin.

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The Miners’ “Greed” will Save Bitcoin

It just occurred to me that the Bitcoin system of production does not need to be controlled at all, not pogrammatically, not even by any rule. What will limit production is the profitability of miners. At this stage of development, Bitcoin is increasing in value, and mining is very profitable. It cannot remain so forever, if production is not limited by absolute quantity. Assume for the sake of discussion that there is no limit. Every miner, to increase profitability, would produce as many Bitcoins per second as he could. There will be over-production, and subsequent inflation (inflation in quantity, and then eventually reduction in value [the alternate "definition" of inflation]). As the value of Bitcoins come down, naturally the profits of miners will come down also, if measured in terms of how much a Bitcoin can buy. The system will tend towards a state of equilibrium, one in which the profitability of miners is throttled by inflation (in the second sense), and the value of every Bitcoin stabilizes.

This absolute limit on quantity is fictitious anyway, and I daresay it is GOOD that it is fictitious.

Let’s say that the miners “collude” among themselves in order to remove the absolute limit on quantity. As the moderator of this forum pointed out here: https://bitcointalk.org/index.php?topic=145475.msg1543280#msg1543280, there is really nothing that can stop the miners from changing the quantity rule, except the wallets in everybody else’s possession. What if the miners themselves also start distributing their vesion of the wallet, with compelling advantages to the user? (For example, a version with a much pruned Merkle tree, so that everybody with a smartphone or any handheld device can use it.)

So now the question to ask is, if the limit on quantity is fictitious, what sets Bitcoin apart from any fiat currency in use today? Every fiat currency is controlled by some monopoly, a monopoly necessarily sanctioned and enforced by the state. In Bitcoin’s case, such monopoly does not exist. In Bitcoin’s case, its own market will control its quantity, while any fiat currency is prone to hyper-inflation because its monopolistic structure does not present a feedback mechanism to limit production or “printing”.

The two worries I expressed in my previous blog are in reality no cause for concern. I now believe in Bitcoins much more than I ever did. If a version of the wallet that can run on a handheld becomes available (as I am sure it will, soon enough), then its proliferation will further enhance its own integrity, as I explain here: http://ctapang.wordpress.com/2013/01/30/more-on-bitcoins/.

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Would Bitcoin Suffer a Similar Fate as that of Unix on the Desktop?

I have seen the Grand Canyon of Arizona, and I am still smarting from its effect on my perception of reality. Its grandeur reminded me of a paradox, the paradox of what I would call “chance and permanence”: nature works mostly by chance, but what it has wrought so far is almost permanent. In the beginning, I am sure the path of the mighty Colorado river that formed the Grand Canyon was determined mostly by chance. As time went by, and the canyon went deeper, what was determined by chance is now almost permanent. Every twist and every turn, every steep cliff that formed, every rock that stayed put and not washed away is there by chance, and yet now permanent. It would take great effort, time, and money to change the path of the Colorado river. So we, as observers of the Grand Canyon, can appreciate how its path was formed mostly by chance, but can also appreciate its permanence. And so it is with the rest of the universe.

We can consider even human institutions in terms of the same paradox. Sure, we’d like to think that all our institutions are there by design, and not by chance, and that is true. But there are certain important aspects of our institutions that become permanent purely by chance. We cannot possibly know beforehand which little twists and turns in our lives become very important later, but there is no doubt in my mind that the sum total of those decisions can make each one of us successful or lose out and simply become a statistic. It certainly makes sense to leave less to chance, and the less we leave to chance, the better.

Just as an example, let’s take the Windows operating system. It has now become an institution. It is very difficult to replace precisely because it has become an institution. We can appreciate the fact that until now, despite the presence of free (and some say even better) alternatives like Linux, Windows remains the most widely adopted operating system, by a wide margin. It is not that the proponents of Linux have not tried enough. A huge effort is being spent, not just by the Linux community, but also by the Apple OS community, to dislodge Windows from its position as number one, but so far to no avail. This is what I mean by becoming an institution, mostly by virtue of Windows’ virtues, but also partly by chance. There were crucial steps that Microsoft took, during its early days, that caused Windows to be an institution. Some of those steps, like partnering with IBM in the early days, did not happen by chance. What was left to chance was which little OS to start with, during the earliest epoch called “DOS”.

(Microsoft started not with an OS of its own making, but bought out some OS from an obscure company. Incidentally, it would be wrong to conclude from this that Windows won by great marketing alone. It had to be a good OS also, limited only by available hardware, and had to continue to compete by being the best. Being a good OS is a minimum requirement, and by now that should be obvious.)

Now I have no doubt that Bitcoin will become an institution, something that maybe very difficult, if not impossible to change in the near future. I would not invest in it myself if I did not believe in it. But there are a couple of things that worry me, and I am writing this to see what other serious thinkers would say.

There have been several attempts to bifurcate the path of transactions. Let us remember that these attempts had a sinister purpose. I believe it is also possible to bifurcate the path of transactions, to have more than one set of transaction files, simply by distributing another branch of the software. The system is designed to protect itself from invalid transactions with a sinister purpose. However, if this is done NOT with a sinister purpose, but in order to come up with a better currency, then politically such new branch would be adopted by a large number of users, which would then cause the path of transactions to bifurcate. We would end up with not one database of transactions, but several incompatible databases. The Bitcoin currency would then bifurcate several times to spawn several other currencies, all competing against each other.

Remember Unix? I believe that Unix should have been the number one OS instead of DOS/Windows. It was certainly better, by any measure, than DOS. It did not win out because it bifurcated several times into different versions, all incomptible with one another. Would Bitcoin suffer a similar fate?

The other thing that worries me about Bitcoins is the rule that puts a hard limit to its quantity. I believe that this is reason enough for it to bifurcate. I still have to hear from a reputable monetarist thinker that a hard limit on quantity is good. Here is why I think it is bad.

What makes gold still THE number one standard currency is the fact that its quantity cannot be increased by a simple human decision. It has to be mined. There have been times when its quantity increased by more than the world economy can sustain, and it inflated just like fiat currency (during the Gold Rush, for example). However, there is no hard limit to the quantity of gold in circulation, and I think that the reason it remains the best currency is because it continues to be mined and so continues to increase in quantity. In the end, I think that it’s not the increase in quantity of a currency per se that’s bad, it’s HOW it increases in quantity. I believe that the best currency is one that increases in quantity in relation to worldwide economic activity. In the future, gold cannot remain the best currency because its increase in quantity is not necessarily a good arithmetic function of worldwide economic activity.

A currency is only as useful as how convenient and beneficial it is to use as a medium of exchange. In this regard, Bitcoins are far more useful than gold. Gold has other values apart from its use value as currency. It has jewelry or ornamental value, it has industrial value (as electronic connector in integrated circuits), and monetary value. Its monetary value has now exceeded its two other values because the U.S. dollar is failing in this function as worldwide currency. Contrast this with the pure monetary value of Bitcoins. Bitcoins have no other value than its use for exchange. We can say it has pure exchange value. One of its attractions is that, by being based on the power of the Internet, it is money that can travel friction-free from one point in the world to another. Very much unlike gold, which weighs so much it takes not just some reliable means to transport, but also a secure one. It takes a lot of money just to transport gold; it takes almost zero to transport Bitcoins.

However, and this is a big caveat, even a Bitcoin itself can see its exchange value reduced. It can reduce in exchange value precisely because its perceived value, or market value, is increasing. As it increases in market value, many holders will start to hoard it. (Like me: I plan to hold on to as much quantity of it as long as I can.) Now when it is hoarded and stashed away, the total count of Bitcoins in circulation necessarily goes down. Hoarding necessarily affects the count of daily transactions that occur per quantity of Bitcoins: its so-called net velocity goes down. When the velocity of a currency goes down, we can say its usefulness as currency goes down also. Therefore, what we may see happen is a long-term trend upwards in market value, but punctuated by violent fits of steep drops in price, as the exchange value compensates for market value, and vice-versa. This is precisely what we want a currency to fix: the occasional steep drops, the violent business cycle.

I propose that the violent cycles of ups and downs can be avoided, simply by increasing the quantity of Bitcoins, not asymptotically as it is now, but as a function of velocity. (It should not be a function of market price because market price by definition is always in relation to another currency, like the U.S. dollar, which can also be volatile.) Velocity is easily measured by the count of transactions per minute or per hour or per day even. Note that “velocity” is different from speed (as in elementary physics). Velocity includes the component of direction, not just speed; so for example, a million transactions that occur only between two accounts contributes less to velocity than transactions that occur between many different accounts.

I am a programmer by trade, and I can go in there and make this modification myself, and come up with a different distribution. If enough people believe that my version is better, then the database of transactions will bifurcate, which is not good. Rather than do that, I have chosen to discuss this matter with the Bitcoin community. Even just two currencies competing at this early stage can be fatal. We have a world to conquer out there, and we don’t want to end up like Unix. Rather, we want to be like the Colorado river, cutting deep into the very foundation of world commerce. However, we want Bitcoin to be successful less by chance like the Colorado, and more by conscious decisions like Microsoft’s Windows OS on the desktop.

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More on Bitcoins

I mentioned Bitcoins in “What is Money?” a blog I wrote almost two years ago. In that blog I predicted that by itself, Bitcoins would not gain wide use, that it needed a backer for it to gain the necessary trust of people. Boy was I wrong. Bitcoin has become so popular since I wrote that blog. It has had its ups and downs, but I think it is slowly but surely gaining adherents. I am now definitely a believer.

There are two things about Bitcoins that are quite remarkable.

The data that holds the blueprint for our biological being is stored in our DNA. Now each DNA strand is a very fragile thing. The absolute genius of the design is that the same data is stored not in a single DNA strand, but in billions of copies of the same data storage DNA. The whole organism will have to die in order to lose this data, but even then it is possible to retrieve it. It is even possible to retrieve it from anything the organism has touched.

What has this got to do with Bitcoins? This same idea of a distributed, highly redundant design has been applied to the Bitcoin system. The database that holds all past Bitcoin transactions are stored in a set of files that are distributed in every corner of the world. So the reliability of this database is unprecedented, in that it is truly distributed. It is scattered all over. Once you use Bitcoins, your computer system (whatever it is, a PC, a tablet, a cell phone) will be storing this database. This means that, as it gains wider use, it becomes more resilient. In order to destroy the database that holds Bitcoin transactions, the whole world would have to be annihilated along with it.

Our DNA is somewhat static in that in doesn’t change in our lifetimes, so duplicating it a billion times is trivial. The Bitcoin database, however, is very dynamic, and so computers that store it use the Internet to update each other constantly. The update process itself is complex because a million different versions of the same database can exist at any one time.

Amazing, isn’t it? Bitcoin may be the solution to the coming fiat money crash. It is very decentralized, and so is not controlled by any entity nor any country. The only way that any government can control it is by prohibiting its use, but even then enforcement would be almost impossible. It has now gained a free life of its own.

The other thing that’s remarkable about Bitcoins is its use of cryptography. Of course, the distributed database of transactions is fully encrypted, in blocks. But the more interesting question to ask is, How can I own Bitcoins? How does the system know I own, say 23 Bitcoins? Each of us can have as many Bitcoin “account numbers” as we need. A Bitcoin account is just a long, unique pattern of computer bits, such as

17Wym1bjWKuQ2WhVtgZxvLzFohGp9tDPws

Which happens to be one of my accounts, and which is now useless (more on that in a minute). This pattern of bits is also called a Bitcoin address, and it can be both a destination (payor account) or a source (payee account). For this particular address or account to receive payments, nothing else is required other than this account number itself. Anybody can send Bitcoins to this account. However, because I lost my private key to this account, I can’t use any of the Bitcoins that may be credited to it, and nobody else can, either. One needs a PRIVATE KEY in order to send from one’s Bitcoin account. This is no different from needing a password in order to access your email account. If nobody else knows that password, you can be assured that only you are able to read your emails. If you forget that password, and the email system you use does not have a password retrieval system, then all your email is lost.

The PRIVATE KEY is the Bitcoin system’s only way to determine ownership of an account. You can claim ownership of the account above if you know its private key. Simply trying to guess it is next to impossible, because it’s about as long as the account number itself. Lots of computational power will have to be applied in attempting determine that key, which is akin to dropping a safe from a window in order to open it. But even then there is only a small chance of determining that private key and thereby gain ownership of the account. (Some accounts can have more than one private key, just like you can open a bank account that needs two or more signatures to withdraw.)

An account is therefore useless without its private key. This has two implications:

1. The account owner better be sure that this key is safe, specially if the account already holds Bitcoins. Any thief can steal all your Bitcoins by somehow obtaining your private key. If you plan on using Bitcoins, this is one aspect that you have to be extra careful about. Because this private key is not easy to memorize, you will have to store it somewhere. You can encrypt it, but then you will have to remember the key you used to encrypt it. (This is like hiding a key in a drawer, and holding on to the key to that drawer.) Bitcoin trader sites like MtGox.com store this key in their servers, which I think is problematic. It’s not that I don’t trust MtGox.com, but if anybody lays their hand on those private keys, they would be certainly tempted to run away with all those Bitcoins. I would never allow any of my private keys to be stored anywhere else except in something that is in my possession. However, even storing it in any of my personal computers can carry a certain risk because cyber thieves can possibly get hold of them. I think the safest way to protect an account that holds some considerable amount of Bitcoin money is to encrypt the key using another key that is very easy to remember but very difficult for others to guess, copy the encrypted key to a USB thumb drive, and then hide that thumb drive in a safe.

2. It is quite possible for an account that holds lots of Bitcoins to get lost, like I lost my key to the above account. My understanding is that, Bitcoins lost in this manner are lost forever. In other words, if I inherited millions of Bitcoins from my father, and he dies without giving me the private key, there is no way for me or even my descendants to retrieve those Bitcoins.

I may be wrong on this, but I think this also means that, the absolute count of Bitcoins can decrease in time. This happens to real coins too, and so minting of real coins is a regular affair. However, in the case of Bitcoins, it seems that “minting” new coins is not possible. (Bitcoins can be “mined”, but the total quantity that can be mined is also limited.) Even though each Bitcoin is divisible into billions of parts, the value of each Bitcoin, and each of its billions of parts, can only increase and never decrease. No inflation! But deflation maybe just as bad as inflation. This certainly is worth looking into more closely.

Nevertheless, in the current state of affairs, Bitcoin has certainly exceeded expectations. I believe it will continue to do so in the foreseeable future.

Posted in Money and Economics | 2 Comments

The Freedom to be Selfish

Ayn Rand shook the world with her prescription for what ails it. She offered a very simple prescription, one that goes against everything we have been taught so far, from Jesus Christ to Ghandi. She wrote that selfishness is a virtue, and if we simply behaved in our self-interest, things would be better. I have lived by this ethics most of my life, and I recommend it to everyone else.

Austrian economists see the world in similar terms, from the economics point of view. Economics presupposes human economic actors that act in their self-interest. It is impossible to draw conclusions if economics were to start from a different premise. I am not saying that Austrian economists have declared the moral superiority of selfishness, but their methods of analysis would simply be invalid without starting from the premise that everyone is acting in one’s economic self-interest.

What is self-interest, and what is selfishness? These two words mean the same thing, from an ethical standpoint. Self-interest is the euphemism for selfishness. Selfishness is a bad word, and it’s always been used with negative connotation, until Ayn Rand came along.

We use the word self-interest in the context of a legal contract. When we enter a contract or sign an agreement, the presupposition is always that we are doing so in our interest. We never sign an agreement that would be detrimental to ourselves. In fact, lawyers can easily argue that a contract is invalid if it were signed with one side being disadvantaged by it. Contracts have to benefit both sides, both signatories. Notice that lawyers never say “you signed this contract out of your selfishness”. In essence it means the same thing as signing a contract in one’s self-interest, but the connotation is bad if the word selfishness is used.

The word self-interest is also used in the context of an accomplished athlete or musician or any artist. The coach would say to the athlete he is coaching: “It’s not in your interest to skip practice today” or “It’s not in your interest to go drinking with your friends tonight”.

The athlete may respond: “What are you saying? I like to skip practice right now. I’m more interested in something else.”

“Yes, I know you’d rather do something else; but if you want to remain at the top of your game, you will practice today. What is more important for you?”

And so on. We sometimes forget what is good for us, and it is sometimes unclear what is good for us. The point is that, in every situation, we can judge for ourselves and the presupposition is always that we are acting in our self-interest.

The word selfishness is mostly used in the context of misbehaving kids or “greedy” merchants. We don’t normally say that Manny Pacquiao is selfish for aiming to be the best in boxing, but if we think about it for a second, there is really no difference between a merchant aiming for the highest price for his merchandise, and Manny Pacquiao aiming to win his next bout. The merchant looks for that merchandise that he can charge the highest price for. (By definition, it is that merchandise that has low supply in relation to demand.) Nothing wrong with that, because by providing that rare tablet computer (for example), he has served me well as a consumer.

He is selling rare tablet computers at great risk to his capital. If he were to set a price that is too high for me, I simply refuse to buy his merchandise, for selfish reasons.

There are Rules

What makes an action bad? Where goes ethics if we are all to act selfishly? This is where most of the confusion arises. Ayn Rand correctly pointed out that so far, the ethics of altruism has dominated our world view, and we have looked at this question from that standpoint. We can clear this up simply by dissociating the word selfishness from its bad connotation. To act selfishly does not necessarily mean to act badly, and the dissociation is only possible if we give up the ethics of altruism (living for others).

Two points are most relevant here:

1. The ethics of selfishness does not mean the absence of rules. If we are to act in our self-interest, we also have to respect the interest of others.

Many people think in terms of a zero-sum game in which if one side wins, the other has to lose. Not necessarily. If I buy the latest tablet computer from a merchant, he wins, but I also win. I win because I got the tablet computer I have been salivating about, at a price I have emotionally associated with that computer, without having to travel far to get it. He wins because from his standpoint, that tablet computer is costing him money every day that it stays on the store shelf. Now what if the tablet computer is defective? Then I should have the right to return it. If he refuses to take it back and return my money, he has violated the ethics of selfishness in two senses: by not making sure that the merchandise is good, he has effectively fooled the consumer (me); he has also stunted the growth of his business because it is easy to spread bad news about bad merchants, and he may very well lose his market. In essence, he has not acted selfishly by selling bad merchandise.

2. Many people believe that merchants, specially those earning good money, are bad because there’s no other way to win except by cheating. This thinking is so ingrained in us that, most small businessmen also think the same thing, that they can only be profitable by cheating. So we have both sides, merchants and consumers, reinforcing the same belief. To top it off, this belief is also reinforced by laws that small businessmen have to work under.

The merchant is hobbled by so many unreasonable rules that he is forced to cheat and go beyond the rules. These rules were made under the assumption that merchants and traders cannot be trusted and have to be regulated. In this kind of environment, it is almost impossible to be ethical, and so the beliefs become self-fulfilling. Indeed, this bad reputation has become part of our language: in Cebu, to say that some product is “commercialized” means it’s shoddy and has bad quality. In the U.S., “commercialized” means it’s either sturdy or in large quantities.

Lance Armstrong is the epitome of being unethically selfish. He decided that, in order to win, he had to cheat. He justified it by suggesting that it is the trend in sports anyway. No, Lance, you joined Tour de France agreeing to the rules. You broke the rules, so you haven’t really won, no matter how you put it.

If the rules are CoRRECT, it IS possible to win without cheating.

There are CoRRECT Rules

Imagine a game that looks like basketball, but is not really basketball because the scoring rules are heavily skewed to favor the weak. Let’s say the rules were made in the interest of those who are bad at basketball, to “level the playing field”, so to speak. Here are the rules:

1. The winning team is allowed to be ahead of the losing team only if the difference in scores is odd (1, 3, 5, and so on);

2. If the difference in scores is even (2, 4, 6, …), the winning team will have to give up half of the difference to the losing team.

So for example, if the score is currently Ginebra at 30, and Alaska at 31, both teams get to keep their scores unchanged, and Alaska is winning. However, when Ginebra scores 3 points, the score can’t be 33 and 31. Ginebra will have to give up one point so that now the score is 32 and 32. Let’s say that Alaska then scores 3 points also, so that the score is now 32 and 35. Alaska keeps the score of 35, and of course Alaska will try to keep their advantage odd by scoring a 2 next time (the next score Alaska should aim for is 32 and 37, keeping the difference odd). Ginebra on the other hand, only needs to score an odd number, say 1, so that if the score is now 33 and 37, the difference is 4 and Alaska will have to give up 2 points making the scores equal again, at 35.

Knowing how difficult it is to win a game of basketball even with normal rules in place, do you think any team would be interested in playing this bastardized basketball game? Probably more importantly, do you think people would be interested in watching it?

And yet that is exactly how laws are formulated in Pinas (which is basically how it is now also in the U.S., the Kingdom of Obama). Article XIII of our 1987 Constitution says, in the very first section:

“The Congress shall give highest priority to the enactment of measures that protect and enhance the right of all the people to human dignity, reduce social, economic, and political inequalities, and remove cultural inequities by equitably diffusing wealth and political power for the common good.

“To this end, the State shall regulate the acquisition, ownership, use, and disposition of property and its increments.”

Our constitution enjoins the congress to make rules that “… reduce social, economic, and political inequalities, and remove cultural inequities by equitably diffusing wealth and political power for the common good”. This gives government all the authority it needs to disregard limits to government power as stipulated in the Second Article (The Bill of Rights), in the name of the “common good”. Here you see the influence of altruism on our constitution. What is the “common good”? Who can define what is the common good in a case? Only the government can.

The second part of Section 1 is a direct consequence of the first part: the governent can REGULATE all aspects of property. The “common good” can only be carried out if property rights are weakened.

These basic rules in our constitution guarantee that the economic game played in Pinas is one where it is very difficult (if not impossible) to win in the market. If you don’t want to cheat, then you have to influence government to grant you exceptions (favors). The government has to decide who wins (not the market) in the name of the “common good”. You, as a businessman, is handicapped from the very start.

Funny thing with our constitution is that it tries to ameliorate one section with another. Right in the second section of Article XIII, it says:

“The promotion of social justice shall include the commitment to create economic opportunities based on freedom of initiative and self-reliance.”

Huh? What does this mean, exactly? Can any lawyer explain this? Can you cite an example of legislation that adheres to this section?

The predominance of the ethics of altruism has skewed our logic so much that it has corrupted Pinas at several levels, from the highest (Supreme Court), to the lowest (local government). Our biggest problem, in my mind, is that we have no politician working with the mindset of the ethics of selfishness; and we have very few intellectuals who constantly drive home the point.

Who Wins and Who Loses in a Society of Selfish People?

In any society there are winners, and there are losers. It does not matter what type of system is in force in a society (Capitalist, Socialist, Communist, or even Islamist) there are those who do very well, and those that do very poorly. Aiming for equality of outcome, as our constitution clearly does, is futile. It is possible to be equal before the law, but equality of outcome is an illusion. What matters is not that there are winners and there are losers (inequality of outcome); rather, what matters is how winners and losers are determined.

In a Communist society, those that belong to the Communist party are automatically chosen to be the winners. The losers are those who choose not to join the party. There are clearly tremendous advantages if you join the party. For one, you can become a government official if you join the party, and government power in a Communist regime is absolute.

In a Socialist society, the winners are those who work in government because government is also very powerful in a Socialist society. In an Islamist society, the winners are automatically chosen to be the clergy; the losers are those who resist Islam and belong to a different religion.

In our current system in Pinas, which is more Socialist than Capitalist, one wins by being part of government. If you are a big businessman, you ignore the government at your peril. This is the reason why Mr. Villar is in government, and likewise many of the ruling families.

In a Capitalist society, people with abilities win. It is not perfect by any means, but in general, if you have some marketable talent or quality (like good looks) you win in a Capitalist society.

So in a Capitalist society, even though there is no guarantee that you win in the game of everyone for himself/herself, you have a shot at it, based solely on your marketable abilities or quality. If your abilities are not good enough to put up a store, then you can’t make it in the Sari-Sari store business. If you cheat, your customers will eventually find out, and you can’t win either. You stay at the bottom. If you have a marketable skill, like writing suspense novels, you can earn good money and win by using your talent effectively. If you are a good boxer, there’s a place for you in boxing. If you have good looks and you know how to use it, then you can end up with a winner as partner, or help a merchant attract buyers and get paid handsomely for it. If you study well and become a good accountant, you win because a job will be waiting for you.

Having seen several countries in various degrees of being Capitalist, I think it won’t be a bad observation to make that, to the degree that a society is Capitalist, it is as difficult to make it to the top as it is to get to the bottom. To the degree that a society is Capitalist, more people stay in the middle (neither very rich, nor very poor). So in the end, without even wishing for it, a society that simply practiced basic rules ends up having more equality of outcome than a society that explicitly aims for it, as Pinas does.

The Freedom to be Selfish

We need rules that allow people to be selfish, while also allowing those who want to be selfless to practice their altruism. It is very difficult to be consistently selfish, but for most people it is impossible to be altruist. The key is to allow people to be either one. Our constitution has a huge bias against selfish people, and we can see the results right before our eyes.

What About the Poor? Most of us are charitable by nature, and we become even more so by winning. In fact, it is good marketing practice to care for the poor. Big companies trip over themselves trying to show who is most charitable. It is proper and good for individuals to be charitable and actually visit the poor, but it is wrong for government to be benevolent, because it just cannot and should not. Government is the only entity in society that we allow to have certain powers over us, and for it to be benevolent it has to use those powers for that purpose. The rise of Communism in the past can be attributed to the very idea of trusting government to be benevolent.

At one extreme, we have seen the horror of a “benevolent” government in the hundreds of millions of people that have been killed by such governments. China has skeletons in its closet in this regard, and it will haunt them later. We in Pinas at least do not have that many skeletons in our closet. Our conscience is clear, and we remain charitable.

I hope we can be ethically selfish as well. Selfishness and the primacy of the individual are the keys to upward mobility of the poor, not ideas for the “common good”, for there is no such thing.

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