A brief note on bitcoin and labor theory
I am throwing this out as notes toward a more comprehensive look at digital currencies in the future from the perspective of labor theory. I am not sure any of the points I am making here will stand up to further scrutiny. I only offer it because some folks have asked me for my opinion on it. –Jehu
Among a certain section of anti-statists there is something of an obsession with the “digital currency”, bitcoin. Bitcoin is supposed to have everything going for it that would make for an anti-statist wet dream: it is said to be decentralized, not subject to government regulation — although this will change — “produced” under the control of a program that imposes strict control over its creation, etc.
The last point in particular seems to be a selling point for the “currency” among some of its proponents. With every central bank on the planet pumping counterfeit fiat into their respective national economies and the world market, Wikipedia notes:
“Some have suggested that Bitcoin is gaining popularity in countries with problem-plagued national currencies, as it can be used to circumvent inflation …”
Actually, looking at the literature, it occurs to me that one of the most egregious errors in thinking by the critics of bitcoin is the possibility its scarcity will collapse, because of the emergence of imitator “digital currencies”. In these notes, I want to show why I think this may not at all be true. For reason that will become clear, I believe it is the scarcity of bitcoins that may be the most critical weakness of so-called “digital currencies”.
For instance the blog, Critiques of Libertarianism, directs this sort of “criticism” at the “currency”. If bitcoin becomes a commercial success, other digital currencies will emerge that will increase the supply of decentralized, private digital currencies. As the writer of this blog post suggests, bitcoin would essentially be killed by its own success as a hedge against inflation:
For all its technotarian groovyness, Bitcoin suffers from classic private currency flaws that make it a scam.
Bitcoin MIGHT work if only it was able to be unique. But there is nothing to stop a proliferation of identical networked coinage systems. Even if it were patented, the patent would expire. With no intellectual property protection, we would see an unlimited set of identical citcoin, ditcoin, etceteracoin.
With no limit on the amount of identically created coinages, what could stop the precipitous decline in value? Trust in the original? What reason would anyone have to trust one more than another? The basic problem is that bitcoins are ENTIRELY speculative in value: there is no intrinsic value (such as a real-world use) to them at all except perhaps the value as a medium for exchange: but there is no scarcity of mediums for exchange, so no intrinsic value.
We’ve seen this in the past when private currencies were attempted. Without trust in the currency because of a backing in something with intrinsic value, it rapidly can become worthless. Bitcoin has no backing. Even if it had backing, insiders may remove the backing and leave the currency worthless.
Bitcoin relies on some computational artificial scarcity to claim that it won’t explode in volume and thus inflate away to valueless. I’d have to see a clear explanation before I believed it, but even so the prospect of innumerable competing identical currencies would create the same problem.
Bitcoin looks like fool’s gold to me. A classic scam of selling something that will eventually leave somebody holding a worthless currency.
The first error in the above argument by the writer of the post, Mike Huben, is the idea that the scarcity of “digital currencies” gives them value and as this scarcity declines, so will the “value” of the “currency”. This is common enough idea that has great sympathy among some Austrian oriented activists (although there is real analytical problems even for most Austrians, who cannot explain how or why bitcoins become “money”).
Nevertheless all of the difficulties there are with classification of bitcoins as digital currencies. So let’s assume for the moment all of these difficulties have been overcome. If we accept, despite these difficulties, the widespread delusion among some activists that bitcoins are a privately generated digital currency, we can think of it as being just like any other currencies. So, I won’t quibble over whether it is actually a currency, but take this assumption as my starting point of critique.
Since we are dealing with bitcoin as a currency — a money form — we cannot rightly say it has a price, since, in labor theory, money has no price. Instead, bitcoin has an exchange rate with other currencies like it: euros, dollars, yen, yuan, etc, and, like these other currencies, bitcoin has no intrinsic value, but only symbolically represents value. To discover the value represented by some quantity of bitcoins we cannot be confused by the exchange rate of bitcoins with dollars or euros, but have to find its expression in a commodity money, like gold.
Why would this be true?
The answer is pretty simple: Since dollars, euros, yen and yuan themselves have no value and bitcoin has no value, the actual value of every exchange of bitcoins for another currency, no matter how large, is always zero. An exchange rate of 600 dollars to 1 bitcoin is, in value terms, 0 : 0; this would also be true for an exchange rate of 1 dollar to 1 bitcoin; or even 1,000,000 dollars to 1 bitcoin or 1,000,000 bitcoins to 1 dollar. From the standpoint of labor theory, any exchange rate between dollars and bitcoins is possible because every particular exchange rate is equal to all of the others, namely 0 : 0. The ratio of exchange between dollars and bitcoin, no matter what this actual exchange rate might be, is determined by the value of the two currencies, not their quantities. Since the value of the two currencies is zero, any actual exchange rate must be 0 : 0.
This means that the exchange rate between dollars and bitcoins cannot be determined by the relative value of the two currencies; it must be determined by something else having nothing to do with the relative value of the two currencies. What might explain the exchange rate between dollars and bitcoins?
One explanation we are offered by both defenders and critics of bitcoin and other digital currencies is the relative scarcity of the two currencies with respect to their relative demand schedules. But here is the problem with that: In reality, the daily demand for bitcoins in commerce is not even a negligible fraction of a negligible fraction of a negligible fraction of that for dollars. But, for the sake of argument we will ignore this fact too — just as we ignore the problematic reality of calling bitcoins currency. For a moment we will leave out the fact that we are speaking of two very, very, different orders of magnitude.
Instead let’s talk about the demand for each currency in relation to its own base of supply: the currency of each type actually in circulation. Let us further concede to the “scarcity as value” crowd that, indeed, relative to their respective supplies, the bitcoin is more scarce than the dollar. Moreover, since the Fed is busily pumping almost a trillion dollars annually into the world market, while the rate of bitcoin creation is programmed to gradually fall to zero, we will concede that the current relative imbalance in demand to supply (scarcity) will always be in favor of bitcoin — which is to say, of the two currencies, bitcoin always will be the more scarce relative to demand than dollars.
We now have fully conceded to all of the arguments of the so-called “scarcity as a form of value” school. What then is the result of all of these concessions in terms of the prospect for bitcoins as a digital currency of the future?
If, on the one hand, bitcoin will become increasingly valuable over time, this means, on the other hand, that the price of commodities denominated in bitcoins will rapidly deflate.
What impact will this have on the production of commodities?
Well, since the price of commodities denominated in bitcoins is the only way productive capital can recover the costs of production plus an average profit, the collapse of prices must lead to a wholesale collapse of profits. Since the capitalist mode of production is determined by production for profits, not by the relative scarcity of currency, the fall in profits must lead to a collapse of production for profit.*
Even if we assume bitcoins never become a currency, but the Federal Reserve is replaced with a digital automated system operating exactly according to the programming of bitcoin, the mode of production would still collapse.
I do not need to prove this theoretically, since there are enough cases in history to show how banksters manipulated the supply of currency to bring commerce to a temporary standstill for their own gain. As Marx noted in Capital, London banksters in the 19th century made use of this artificial scarcity of means of exchange to impose their control over the economy.
In fact, by looking at what would happen under a bitcoin currency regime allows us to understand why the gold standard was overthrown. It was precisely to allow a counterfeiting of currency, not tied to a definite unit of gold, that ultimately forced governments off the gold standard in the Great Depression. Since currency tied to gold prevented the state’s depreciation of the currency, the collapse of profits could not be prevented. To escape the collapse of profits, states had to move off of the gold standard. This move allowed the fascist states to regulate prices and force prices to rise in order to subsidize profits.
*FOR THE RECORD: The potential for collapse is not an objection to “digital currencies”. Personally, I have no problem killing productively employed capital, since to be productive only means the capital produces surplus value.