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Bitcoin and Austrian Economics

Bitcoin and Austrian Economics image

Bitcoin is a peer to peer electronic version of currency which can be transferred between individuals without the need to involve a financial institution to act as an intermediary. There is an element of the system which relies on a reference to public record and a trust based system of verification. Each bitcoin, or part Bitcoin is composed of a chain of digital signatures from the previous transactions that it has been through, marked by each owner. Each step of the journey is timestamped and shared in a peer to peer network. This system is often referred to as the block chain.

In essentials, Bitcoin resembles an orthodox currency very closely. It is distributed between owners to pay for goods and services as a proxy for value. Where the crucial distinction comes from an Austrian economic perspective, would be that there is no government manipulating the Bitcoin market. Austrian Economics is a blanket term for the free market ideas that are most commonly known from the work of Hayek and Friedman. Austrian economists agree broadly that deregulation of the economy is a positive move. It rests heavily on the central idea that no object or service can hold an objective amount of value. Value is purely defined by the capacity of an item to fulfil human wants. This means that there is no way that a central government body could manage the prices of goods and services which would be rational, there would be no way for them to manage the relationship between subjective and fluctuating value with prices from their position because human wants are so fluid.

A central financial institution using a standard currency might try to manipulate the price of goods by introducing tariffs or reducing the available supply of the currency but in Austrian economics this is an interference between the wants of human beings and a responsive market. Bitcoin is more compatible with the pursuit of an Austrian economic model for two main reasons. Firstly, the supply of Bitcoin is not regulated by a government according to ideas about a desirable social aim or to manipulate the terms of international trade. For an Austrian economist, this is the only rational way to proceed and enables the subjective but real . Secondly, because Bitcoin is not recognised as currency by any government, it cannot be taxed. As a result, a transaction conducted in Bitcoin, necessarily happens outside the taxable economy and beyond conventional regulation which means it could reflect the value of goods more accurately by providing space for a more dynamic market.

Bitcoin is sometimes criticised for having a lack of security in cases of fraud. From the perspective of a free market economic scheme this is a problem that will naturally fix itself. Those trying to commit fraud will be found out and the resulting loss of trust in anything they offer will prevent them being able to commit fraud repeatedly and potentially penalise them for the behaviour by costing the perpetrator additional opportunities.

Bitcoin and to some extent other cryptocurrencies are highly compatible with Austrian economics and as a form of dynamic investment they give a great deal of freedom.

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