Response to Hülsmann & Hoppe from PFS 2012 Q&A session day two

Professors Hülsmann and Hoppe answer a question from the audience about Bitcoin around 32 minutes into the video here:

http://propertyandfreedom.org/2012/12/day-2-question-answer-session-pfs-2012/

This is a quick response to them.

Hülsmann argues:

“It’s anticipated in the system that under some circumstances you can create more units. So somebody is authorised. Because if you don’t, if you just keep the current supply, then you get a very very strong price deflation as soon as Bitcoins spread. So somebody must be authorised to create more I suppose. So somebody has the keys to the whole thing, so which reason do we have to trust those keymasters more then minters of gold coins?”

First of all, the production function of Bitcoin is defined as an approximately geometric convergent series. An attempt to produce Bitcoins without fitting into this schema does not, by definition, produce Bitcoins, similarly as creating an atom which does not have 79 protons in the nucleus does not, by definition, produce gold. One might be tricked into thinking that something which does not (entirely) consist of atoms with 79 protons in the nucleus is gold, because it is prohibitively expensive to verify the number of protons in all the atoms of a physical object the size used for transactions, but this is an empirical problem (and for gold could be solved by nanotechnology as Robert A. Freitas argues). From a practical point of view, this problem does not occur with Bitcoin, as the verification is done by computers and from the perspective of a Bitcoin user is automatic. The blockchain lists all the produced bitcoins and is publicly available for anyone to verify, again, by definition. An attempt to create Bitcoins outside of the specification would be akin to an attempt to inject new characters to the English alphabet, let’s say the “ü”. It’s evident for anyone that is familiar with the English language that “ü” is outside of the specification and they do not need to worry that someone will fiendishly inject it into the alphabet, screwing up their command of English.

So noone is, by definition, allowed to create Bitcoins outside of specification. The only thing that can happen is a creation of an incompatible blockchain fork, i.e. the creation of a new wannabe currency.

Hülsmann also commits a non-sequitur fallacy. It does not follow that price deflation allows to create new Bitcoins. Maybe Hülsmann is used to how it works with gold and assumes that if the market price rises above production costs, this increases the production rate. But Bitcoin does not work like that. The global production rate is, apart from minor statistical fluctuations, predefined. An increase in the production intensity does not result in an increase of the amount of the bitcoins produced, rather it raises the production costs. The production function of Bitcoin is less elastic than that of gold. The result is that marginal production costs follow the market price. I want to do a proper analysis comparing the marginal production costs and the market price to demonstrate this, but for the time being, only visual comparison is available by checking out the graphs provided by bitcoincharts.com and bitcoin.sipa.be:

Empirical data shows that since the emergence of price of Bitcoin until now, it has appreciated by a factor of about 17,600 (from about 1/1,309.03 USD to about 13.51 USD at the time of writing), without any problems in the production function. Just about two weeks ago, the first block reward adjustment occurred and everything worked according to the specification.

Hoppe argues:

“I always ask people ‘Can you explain to me quickly what Bitcoins are?’. And then I typically get such complicated answers that I think ‘who in the world would ever want to hold something that a decently intelligent person like myself cannot understand?'”

This sounds intuitive, but it actually is not necessarily true. For starters, at the most generic level, Bitcoin is just a clearing system controlled by cryptography, combined with an internal inelastic production function. It’s as if gold miners through the act of mining gold also provided clearing functionality. And indeed, Bitcoin as specie provides many functions that historically required money substitutes, and from economic point of view this is the most relevant aspect. I don’t think at that level it is too complicated to understand (maybe it’s complicated to explain).

On the other hand, gold, for example, is defined by the number of protons in the atomic nucleus. But people did not even know about protons until about a hundred years ago. That did not prevent them from using gold as money. I bet that professor Hoppe does not understand the details of valence, chemical or nuclear reactions to a significant extent. If someone started explaining gold to him from this scientific point of view, he might be confused just as he is about Bitcoin.