It so happened that there is a bizarre competition in the crypto world on who is more “Austrian” and “Keynesian” is used as slur. I would call myself neither and I would like to look at the cryptocurrency economics from the mainstream economic view. When I say “mainstream”, I mean the economic concepts broadly considered as non-controversial and fairly common sense by the majority of economists, regardless of their political stance.

The classic economics teaches us that there are three factors of production:

  1. Land and other natural resources,
  2. Capital – machinery, equipment, technologies, goods etc and
  3. Labour – human talent, skills and work.

These three factors applied together create wealth. This is basic common sense. Everything we consume eventually stems from the nature and is processed by human labour using machinery and equipment.

Money is a tool used to serve this economic process but not a factor of production itself. Money does not have value on its own but it can derive its value from being inherent part of an effective economic system. Again, this is a common sense – you would not value gold, dollars or bitcoin on an inhabited island. You would prefer having food, clothes and shelter. But if you live in a civilized society, having a liquid, universally accepted asset which can be immediately converted into the real commodities gives you enormous benefits and this turns that super-liquid asset into the store of wealth.

Hence, strength of a currency depends on the economic and political strength of the nation which recognises it as medium of exchange. If the system which the money is looped in gets broken, the money devalues. This is what going on in Venezuela and what was going on in the Weimar Republic and post-Soviet countries – deep institutional, political and economic crises made their money worthless.

On the other hand, well-developed nations with sustainable political systems struggle to create inflation even when they want it in order to fight economic recessions. In the recessionary environment, people and companies crave for savings and would continue to absorb inflated money supply. The famous villain Paul Krugman even once argued that the Bank of Japan have to promise to be reckless, as credibility of this institution is a big obstacle in achieving its inflation targets.

Let’s move to cryptocurrencies now. What can make a digital currency valuable? Exactly the same thing: being linked to the economic process where land, capital and labour interact to create wealth. Cryptocurrencies will be more valuable when they will serve the global economy and more and more players will start accepting and using them across the globe. While the price is not the goal in itself. Cryptocurrencies can make us richer by revolutionising the wealth creation process by moving it from the bank/debt run economy to a freer decentralized economic system.

In money, the social relationships among human beings have been reduced to a thing, a mysterious, glittering thing the dazzling radiance of which has blinded the vision of so many economists when they have not taken the precaution of shielding their eyes against it. (Carruthers and Babb – American Journal of Sociology, vol 101, p. 1556)

 

 

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