Bob Murphy, Austrian economist and libertarian theorist joins me on the show to talk about his views on Bitcoin and Austrian economics. We chat:

• Bitcoin’s evolution in stages
• Bitcoin and non monetary use
• What bitcoiners are getting wrong about Austrian economics
• Money is not a measuring rod
• What it would look like under a Bitcoin world

Bob Murphy links:

• Twitter: @BobMurphyEcon
• Site: BobMurphyShow.com

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Stephan Livera links:

• Show notes and website
• Follow me on twitter @stephanlivera
• Subscribe to the podcast
• Patreon @stephanlivera

Podcast Transcript:

Stephan Livera:

Bob welcome to the show.

Bob Murphy:

Thanks for having me.

Stephan Livera:

Bob, I’m a huge fan of your work. I’ve really read a lot of your writing which, and you’re quite a prolific writer and a producer of content. So definitely very excited to chat with you today about Bitcoin and Austrian economics as well. I guess I’d love to just start with a little bit of your thoughts on kind of where you see Bitcoin right now, in terms of, I know you’ve been following it for some time and you were writing about it and speaking about it I think in 2012 or 2013, if I recall correctly. So I know you’re no stranger to it, but I’m curious what your thoughts are on it and where you sort of see the adoption of it going.

Bob Murphy:

Sure. So I was not in the first wave, I suppose, of austro-libertarian types who were into Bitcoin. So there were people and my friends and associates who, some of them early on were telling me, Oh, you should check out Bitcoin. And I didn’t know what it was. And I was, Oh yeah, I’ll look into that. And I just, didn’t in retrospect, I wish I had looked into it earlier, obviously, as most people say. And then, yeah, I think it was I don’t know if you know, Tatiana Moroz, but she, at one point said to me, something like the thing that really got me interested was she said something like these Bitcoin conferences. Well, first of all, the normal libertarian conference is real. I don’t know if she used the phrase doom and gloom, but she just said, it’s kind of, it’s sort of like, we’re all kids sitting in the corner and we know everyone else is stupid, but we’re not changing anything. But something like that, she said, but when you go to a Bitcoin conference, you said, it’s, everyone’s real happy and they’re productive and they’re creating things and it’s just such a different vibe.

Bob Murphy:

And I was like, Oh really? And I think that was her comment on that was what got me interested in terms of like, what actually and got me to go look at it. So just as an economist, I was interested in it just to understand how does it work? So I had to talk to enough people and read some things to at least understand the mechanics of it enough. So I thought, okay, I get what it is. And now let me look at it as an economist and see how does that work? So you’re probably familiar with Silas Barta. I wrote a understanding Bitcoin guide early on. It was because at that point, so things are way better now, but at that point it was like the people who were technical and understood how Bitcoin worked, didn’t really know that much about monetary theory.

Bob Murphy:

And so the way they would talk about Bitcoin, it wasn’t quite right. And then the people who knew monetary theory the economists, they didn’t really understand how Bitcoin works. So they were saying dumb stuff. So that was the function of that guide was kind of just to give people the language and the framework. So throughout, I’ve always been trying to be agnostic about like, Hey, I’m not giving investment advice, but I was willing to say to people that I think, yeah, the year 2050, like people will know who owns the Bitcoins. I mean, some will be lost and whatever, but it’s not like it’s just a passing fad and no one’s going to care about the ledger anymore, as I did think that was going to be, but I wasn’t sure is it just going to be curiosity because some new cryptocurrencies were just so much better that they eclipsed it, I wasn’t sure about that.

Bob Murphy:

So I guess now, I mean, it’s clearly done very well, surpassing most people’s expectations except like the hardcore believers who are like, “Nope, no, this is going to be the currency of the future.” And so it’s, I guess recently my I’ve I’ve started doing more of it and this, this is the last thing. And I’ll turn it back to you. I know I’ve been talking here for a bit, is that it’s what Bitcoin did in terms of like the Austro-libertarian framework is Friedrich Hayek had an essay in the seventies called the de nationalization of money where he proposed where he said that fiat currency, fiat money has this bad rep. And that’s because monopoly governments have always issued it. And just like, if governments always build roads, the roads are terrible, but that doesn’t mean roads per se are always bad and sort of Hayek envisioned, could there be competing fee money issuers in the private sector where it’s all voluntary, but there, you still had the problem of trusting the issuer that once they got market share, how could you stop them from just unloading a boatload of the currency? That sort of thing.

Bob Murphy:

So that’s really what the innovation that Bitcoin gave. So that’s what attracted me to it. And so now more recently though, I made some wise guy remark on Twitter about how, Hey, just because I’m not always talking about Bitcoin doesn’t mean, I think it’s a bad investment or something like that. And someone pointed out to me, he said, no, you’re sitting up a strawman, Bob. Cause I said something like, just because I’m not being obnoxious about it doesn’t mean I don’t like it or something like that. I was making a joke and someone said, no, that’s not the issue. The issue is Bob, this is the most important development in advancing freedom and you know, a century and someone listening to your podcast wouldn’t even know anything about it. And at first I thought the guy was wrong and I went and looked at my archive and I realized, Oh my gosh, I really hadn’t been talking because I wrote the guide and in other people’s interviews who interview me, I would talk about it, but I realized, okay, this guy actually is right.

Bob Murphy:

I thought I had been talking more about over the years and I actually had through my own channels. And so now I’m trying to correct that a little bit. I’m going to have Vijay Boyapati on my podcast soon and talk about things like that. So that’s kind of my schtick. I always thought it was interesting theoretically, and I just wanted to clarify the terminology in the, to so economists and Bitcoin miners and stuff could talk to each other. And then now I’m realizing, yeah, this really is like holding it’s really doing a lot in proving the critics wrong, at least so far. And so just the people who are interested in as a last thing, I’ll say, what it’s doing is sort of like how Uber and Lyft did way more to show the average person that you don’t need licensing of cab drivers and how the medallion system isn’t about consumer safety. It’s clearly just about rents for the cab drivers in the city. You know that, so likewise now when people talk about Oh, well, couldn’t, we have private currencies that used to, that would have been considered crazy. Like, Oh yeah, I want some private, do I want Walmart issue in the money? I don’t think so. But now that you have Bitcoin as an example, I think normal people can look at that and be like, Oh yeah, that’s not, that’s way better than what they did in Zimbabwe.

Stephan Livera:

Exactly. And I think it’s a great it’s great that you’re going to have Vijay Boyapati on your show as well. Vijay Boyapati is very well known in the Bitcoin world. I think. You’ve certainly done your part to teach people about Bitcoin. I mean, you’ve been writing about it over the years. So I think in terms of libertarians not doing enough to teach their followers about Bitcoin, I don’t think you can, people could fairly level that charge against you that you’ve actually done. You’ve done quite a bit to try and help people. And I mean, for listeners of the show, who’ve learned from me, I’ve actually learned for listeners out there, I’ve learned a lot from Bob. And so…

Bob Murphy:

I appreciate that, if I could just say real fast, what it was is I think I made whatever contribution I was gonna do was early on when I was just like explaining how it works. And then like maybe we’ll get into this today with the regression theorem and that, I’m just trying to clarify stuff, but then I didn’t stay on top of the technical stuff. So after a while, that’s partly why I didn’t comment is because I just, I didn’t know enough about the details to be able to really say like the difference between different types of this versus Ethereum. I didn’t feel comfortable saying too much about it. So that’s partly why, but you’re right. Like what I thought I was going to do, I did early on. And so people like you who were really into it, you knew what I did and okay, fair enough. But I think this guy’s point is critical. Mine was more saying just you periodically telling the masses about it “we need your help, Bob”. I think that’s what where it was coming from.

Stephan Livera:

Yeah, of course. And I think that perhaps that charge could be more, fairly leveled against maybe other libertarians out there that, Hey this is actually a technology that could bring about the society that we, as Austro libertarian anarcho-capitalists, it might help us kind of push society in that direction. And I think that’s an interesting idea. But I guess one other point I really wanted to bring up and I think Vijay Boyapati is known for really popularizing this within the Bitcoin world is this idea that Bitcoin is going to move through stages. Now, this is not a new idea. I’ve discussed this with Guido Hulsmann And he mentioned people like Jevons were saying, it’s this idea that moves from collectible store of value, medium of exchange, unit of account in that order. I’m wondering what your thoughts are on that process, as opposed to where maybe some people impose this incredibly high bar and say, Oh no, if it’s not being used as like everything unit of account, Medium of exchange everything all at once, it’s failed and it’s not going to work. What’s your view on that idea?

Bob Murphy:

Let me confess. I actually wasn’t aware of that passage from Jevons until I saw it in Vijay Boyapati’s essay. And so, and even Vijay Boyapati’s essay, I wasn’t aware that or if I did see it, I forgot about it. Cause it was only until more recently it was actually Spencer Schiff sent it to me and said, Hey this is making the rounds again. You know, this was, this came out a while ago, but for whatever reason, this is making the rounds again. And I was like, Whoa. And I said, I didn’t know about that Jevons quote. So it’s interesting just to give your listeners some of the background that part of the hesitancy on the part of some Liberty, or let’s say Austrian fans with that is, I don’t remember the exact quote, but Ludwig von Mises when he was talking about money, said something along the lines of it’s common to ascribe several different functions to money, like to say, it’s a medium of exchange, a unit of account, a store of value.

Bob Murphy:

And he said, these are all it’s not helpful to think of it this way. Money is the universally except the medium of account. And because it’s that, it does those other things like automatically, or there’s something like, in other words, exact words. Yeah. So that’s not actually that doesn’t contradict Jevons or what Vijay Boyapati said, right. It could be that it goes through the stages before it becomes the commonly accepted medium of exchange. And then at that point it does the other things too. So it’s not that Mises was wrong if Vijay Boyapati is right or anything like that. But I’m just explaining why I have tended not to think of money in terms of those different functions, because hey, Mises told me not to kind of thing. And then and also a lot of times too, just the way people use the phrase store of value is just real loosey goosey.

Bob Murphy:

And so even forget Bitcoin, I’m just saying historically like and so that’s just partly why I hadn’t thought of it like that, but yeah, I, certainly the way Vijay Boyapati lays it out, that seems very, very compelling to me. I guess part of the problem is we sort of assume that, Oh, like Vijay Boyapati makes statements in this thing about historically, this is what happened. I don’t know how much we actually know that that’s what happened with gold, for example, you know what I mean? Like we can tell stories and maybe see certain things, but I think it’s kind of tricky from our vantage point to literally know the historical progression, just like I don’t know if you’re familiar with him, Stephan, what’s the guy’s name, David Graeber, the Marxist,

Stephan Livera:

Yeah. The debt as money guy.

Bob Murphy:

So he, I don’t know if you saw my like critical review of his big book, but you know, he thinks the anthropological evidence is clear that Menger and the rest of the Austrians are insane when they give the accounts of how commodity money or commodity goods turned into a money and so forth.

Bob Murphy:

He thinks the different process altogether that would largely be like a state or a sovereign issued, fiat currency. and so like I got in there and I see why he thinks that, but I just showed no, the anthropological evidence you present is actually more consistent with our theory. You know what I mean? Like he just he’s so sure he knows what happens and he goes and looks and says, yup, the data confirm it. And so I’m saying likewise here that sure that history is consistent with the Jevonsian story, but I’m just raising a flag of caution that how well do we really have do we have like diary entries from somebody in the year 24 to confirm that, at this point this is still just a collectible, but it’s not yet money.

Bob Murphy:

You know what I mean? So that, that’s all I’m saying, but it certainly sounds plausible to me. I do think that yes, with Bitcoin, that is what’s going to happen. And in my most recent podcast episode, which I gather you heard, that’s what I didn’t use that terminology, but that’s what I was trying to get through. Is that actually the whole problem of if everyone’s just holding it because they know, Oh, this thing is going to be the currency of the future. It’s going to be worth today’s terms like millions of dollars per Bitcoin. I’d be crazy to spend it. Well, it can never get to that. If everyone keeps thinking that. That problem. And just to show, it’s not end of story. There’s a way to explain that dynamic, but it’s a little bit tricky at first to think through how that works.

Stephan Livera:

I say, yeah, let’s get into that a little bit, because I think this is one of those things where maybe there’s some things that we, as Bitcoiners we’re getting wrong about Austrian economics. And I think as you’re the teacher, you’re the expert you can sort of help us here. And I think that might be one area where this kind of idea of the HODL forever, like, okay, I guess in practice then maybe it’s more like people who’ve been HODLing for years. Each of those people on the margin, at some point as the price rises up, they have some point where they’re like, okay, I might use some of it to buy a house, buy a car for my family little things like that. But along the way up, there’s kind of new waves of people who are coming in.

Stephan Livera:

And I think this is probably a point I think I’ve seen, I’ve learned from you as well, is that all the money is already existing. What we’re changing really is the relative valuations between these things, right? Like the dollars in your account or my account or the Bitcoins that I hold. Like it exists already. It’s already out there, 18.7 million or so today. And obviously the total cap is 21. But really the process of Bitcoin adoption is actually that distributing out to more and more people. And only then can we actually go to the stage of people are going to really use it day to day, whereas until then people are going to be mostly holding. Right?

Bob Murphy:

Yeah. Right. And so again, this is elementary, but let me just say it. Cause sometimes just saying real basic things helps to clarify. So you’re right. If the typical HODLer who’s sitting there, no, I get ’em every spare dollar I get I’m trading in, adding, my stacking sats and whatever. And I’m never going to get rid of them until until the time is right. Like maybe they had that kind of idea and it keeps seeing the price go up. As I see, this is confirming that I’m right. The only way the price of Bitcoin can be going up is if somebody is selling Bitcoins or fractions of it. Cause that’s what it means. Like that’s how we know. Well, what’s today’s price. It means there were people, someone owns Bitcoins and sold them for dollars today.

Bob Murphy:

And that’s how we know what’s today’s price. So it’s a bit weird that if everybody who currently own Bitcoins was going to be a HODL forever person, we would go check and would say, we don’t have any prices. Cause there’s no sales going on. You know what I mean? We’d have to say, Oh, the price three days ago was such and such. And the next day price four days ago was this. And it would just sit there and it wouldn’t go up. You know what I mean? So it’s this weird thing where if you convinced everybody else to be a HODLer or including the miners who were getting new ones, they know no don’t sell them, add them to your stacks, then the price actually wouldn’t go up. It would just stay stuck.

Stephan Livera:

It’s funny to think about, but you’re right. Yeah. But it’s kind of like, I guess that would be, if it’s literally 100% a HODL forever, in reality, it might be even 99% or 99.9% and just that little marginal person? They’re the person setting the price. Right?

Bob Murphy:

And so, yeah. So I think the way around that sort of contradiction or paradox is to say, if you think the price is going to be something in the far distant future. And so you have the attitude. All right. So clearly we just showed, okay. It can’t be literally correct to say everyone who owns Bitcoins, if they were smart, would never get rid of them because then we would all just be stuck holding them. And you know, the price would be undefined or at least you’d say the last known price was, and it would stay there forever. And that’s that’s that can’t be right. And so and yet to get to the future state where Bitcoin is the currency of the world means on every side or on each transaction, one side is going to be the buyer’s going to be giving up Bitcoins for it.

Bob Murphy:

So clearly if Bitcoin is going to live up to what its fans think it’s going to be in the year 2020, or 2100, at that point, it’s not going to HODL forever. It’s going to be no. I mean, anytime you want something, you get rid of Bitcoin. That’s what it does. That’s its function it’s a medium of exchange. You acquire them only because you’re going to give them away in the future to get real goods and services. That’s what a medium of exchange does. And so at that point it can’t be a HODL forever mentality. And so how do you bridge that gap? Is that yeah, just like you said, this is elementary. Once you say go ahead just for the sake of argument to complete it. That if you have an idea of what you know, so at that point, let’s say, Oh, it’ll be 1 Bitcoin

Bob Murphy:

will be the equivalent in today’s money of $10 million each. So right now it’s at 65,000 or whatever, it’s way under priced. So the more I get I’m sitting on them, because I know it’s going to go up as more and more people realize how great this is. That’s correct. But as it gets closer and closer to that, at some point you would say, okay, now I don’t need to hold it forever because it’s actually gotten close to what I think is correct fundamental value is whatever phrase you want to use. So it’s not a HODL forever. It’s hold it until you actually start thinking that it, it actually is now approaching the fundamental value. And then the last tweak is to say, you’re allowed to, as it’s going up, you become fantastically wealthy. And so it’s not irrational for you to sell off some of it, there’s nothing wrong about that.

Bob Murphy:

Like, so even if you were forget, Bitcoin, just you’re sitting on barrels of oil or something, and you think oil is going to be trading for a thousand dollars a barrel 30 years from now, as it starts going up especially if you need cash for something, there’s nothing irrational about you selling it ahead of time. You know, if you could get someone to lend you the money, or maybe you want to do that, but it’s not crazy for you to sell early or there’s other things you could do once they get more sophisticated financial derivatives things and you can buy calls and puts on Bitcoin and futures contract, then you can get more sophisticated maybe. If you thought, Oh no, I’d really like to take some profits now. But I still think this thing is going to go up.

Bob Murphy:

You could do something more sophisticated than just trading it in what you think is still a low ball price. But the point is you, it’s not like you have to sit on it until the year 2140 bequeath it to your grandkids and say, under no circumstance and you trade this until it’s got a market price of 10 million US Dollars that you’re allowed to do that. So that that’s like you say, kind of, and you’re performing a social function. So the more people who had that strategy, that’s — no I’m holding it until it hits 10 million US Dollars because that’s when the whole world of using it. If the price was rapidly appreciating some more and more people started getting in on it. And like you said, just some people on the margin were selling little fractions, just because, Hey, let me sell one satoshi and get a mansion, why not?

Bob Murphy:

Then instead of having to wait till the year 2100, it gets pulled to the forward. And then no, maybe it’s by the year 2025 where it hits that 10 million price. And then we can all start using it as a medium of exchange. So it’s actually performing a social function and all this stuff is predicated on the assumption that the forecasters are right. That actually Peter Schiff is right. Well then you’re hurting things by HODLing your you’re screwing things up even more assuming Bitcoin really is supposed to be the currency of the future or one of them. Then the more people who see that now and act accordingly, you’re actually bringing it forward in time. So we don’t have to wait as long to use the better currency.

Stephan Livera:

Yeah. And so I’m curious as well. So this is like the whole Peter Schiff thing as well, where he’ll be like, Oh, there’s no intrinsic value, but I mean maybe he might be getting at this idea that somehow money must do something else, but like that there must be some kind of non-monetary use for something or that’s one side or the other side would be well, can something work purely as a money? And the idea is as if we’re following in the thought of Carl Menger, looking for the most saleable, really what matters is whatever’s the most marketable or the most saleable? Where do you come down on that?

Bob Murphy:

So I’ll make two, two points on that. And then obviously you can take it however you’d like. So regarding Schiff’s position. And the reason I pick on him is just because it’s a lot of people have been saying that, especially in the hard money pro gold community. They’ve been saying that about Bitcoin. And so my point to them is okay I get what you’re saying. And there’s a sense in which the fundamental value of Bitcoin is zero. Anything above that is just pure speculation in the sense that there’s no rhyme or reason for why should it be 63,000 versus two or versus 30 million? You know what I mean? Like if it’s Bitcoin is whatever people think it’s going to be kind of deal, but by the same token, gold has a commodity per you know, function you know, as an industrial uses and then as jewelry it’s pretty to look at.

Bob Murphy:

And so people would pay for it, but then once it had that and then gained, because it has various attributes, a monetary function, clearly its market purchasing power is much higher than it would have been. Had people not used it though, just like you can see what the demonetization of silver, how the market price of silver fell relative to other things, including gold. And so there’s a sense in which, okay, gold right now is in a bubble because a big chunk of its market value isn’t due to its industrial uses or even as jewelry, but because of its role as the money, or as a store of value, whatever term you want to use right now, if it’s not technically money. All right. So, but yeah, I don’t see Peter Schiff saying that, Oh, gold right now is way overvalued. It should really be about $250 an ounce because that’s what we can explain from it’s fundamental.

Bob Murphy:

You know, he doesn’t talk like that. And so I’m saying, okay, so if you get how gold can be a perfectly good medium of exchange whose market value is whatever it is 2000, because and 1800 of that is due to its monetary history or abilities and only 200 is that, well, that gap then that’s what you could explain. Bitcoin is, so you have Bitcoins at 63,000 or whatever right now. And 63,000 of it is due to its role as a money in zero is due to its role for making sandwiches and cars. And there’s, to me there’s nothing contradictory. And someone like Schiff might be tempted to say, well, no, see there’s gotta be like a fundamental building block. And then the purchasing or the monetary thing gets added on top of that. But with Bitcoin, there’s no foundation, but it’s not a percentage thing.

Bob Murphy:

It’s not that gold would be something like a 200. And then because of its monetary uses, it gets multiplied by a hundred that doesn’t really make — it’s clearly it would be an additive thing. I would say, if you get what I’m saying, so the fact that it’s, you’re adding something, well, why couldn’t you just add to zero instead of adding it to 200 or whatever. So to me, that’s what I’d say on that. And then when you were bringing up the role of the Carl Menger and so forth, so there people, and if you want to, I’ll do a real short version and then tell me, Stephan, if you want to make it longer, it has to do with Mises’ regression theorem. And this again, was something that people would trot out early on, who are fans of Austrian economics, fans of gold, who said, Bitcoin can’t possibly become a money because it doesn’t have this history of just being a regular commodity.

Bob Murphy:

And so Mises famously. What he was doing is he was using subjective value theory, applied to money and a economist before him had tried to do it. So Menger pioneered subjective value theory in 1871, and Mises’ the theory of lending credit comes out in 1912. So there’s a big several decades there. And so you’d think, why did it take so long for Mises to do this? And the reason was some economists had said that, but oh, yeah, just like we explain you know, why is it that oranges trade against the apples at a certain ratio in the marketplace, ultimately, because of subjective preferences that people value oranges and apples on the margin, blah, blah, margin utility. The reason that seemed like a dead end when it came to money was you said, why is it that people value money so much?

Bob Murphy:

He said, Oh, because it has purchasing power, Oh, why does money have purchasing power? Well, because people value it so much. Well you were just arguing in a circle and so Mises solve that paradox or that circular regress. And he said, no, the reason it has purchasing power right now is because we have expectations that we’ll have purchasing power in the near future. Right. I would sell an hour of my labor for a hundred dollars now, because I have this idea that I can take the hundred dollars in the near future and buy stuff with it that I’m willing to give up my labor right now to get the stuff from, well, how do I know that? Well, because in the immediate past, looking around, I can see what a hundred dollars can get me and I can kind of do a rough estimate, but then that looks like you’re just like, okay, so you’re explaining the purchasing power today by reference to yesterday’s purchasing power.

Bob Murphy:

Well, why did money have that purchasing power yesterday? Well, because the day before, and it looks like you’re just going back forever. So economists thought that two is a dead end. There’s a problem with trying to use subjective value. And so then Mises said, no, no, you don’t have to go back forever. You go back to barter when everything was just a regular commodity and then that’s where the explanation stops. So what it was doing rhetorically, the regression theorem was just showing it’s okay for us to use subjective value theory, not just to explain real goods, but also the money good it’s in the same framework. And that doesn’t open us up to charges that we’re committing a logical contradiction or like an infinite regress. All right. So that’s what he was doing with it. And that’s the function it serves.

Bob Murphy:

So you can see why superficially, it looks like Bitcoin can’t work, but strictly, if you go and look at Mises’ arguments, what he was showing, what did, what he was claiming was that anything that’s a medium exchange had to have a prior history is a regular good, just commodity. And so Bitcoin was already a medium of exchange. Nobody would deny that. And so my point has always been a modest, one of the Austrian saying, if you think the regression theorem has something to say about Bitcoins, adoption, or viability, the hurdle would have been Bitcoin can never become a medium exchange because of the regression theorem. Like that’s a plausible, in fact, I would say that’s a straight forward reading that Mises seems to be saying that. And so, since it is a medium of exchange, that means Mises wrong. If that’s what you thought he was saying, but it’s not, Oh yeah, sure.

Bob Murphy:

It’s a means of exchange, but it’s never going to be adopted by enough people that will call it a money. There’s nothing there in what Mises wrote. So I’m saying those who are really claiming that Mises did say it, no, no, the regression theorem says, Bitcoin can’t happen. You’re just saying Mises was wrong. Because really clearly what he’s saying is it can’t become a medium of exchange. So I’m not saying Mises was wrong. It’s possible that we could reconcile the regression theorem with Bitcoin having become a medium of exchange. But I’m just saying, that’s where the log jam would have been. It’s not Bitcoin becoming money.

Stephan Livera:

I think you’re right. I think that was unfortunately a catching point for a lot of Austrians who were more in the gold world where they kind of said, Oh, Bitcoin won’t work. Because of the regression theorem. But I think in some sense, it’s like, well, other people had a different answer, right? People like Konrad Graf. And I believe, I think you had a similar kind of position as well, which was that like, it was more important. It’s more like a show your working. And then once you’ve gone past that initial transaction back in one of those first times when it got transacted in a more barter sense, right? Whether it was the 10,000 Bitcoins for two pizzas or some of the earlier what really early ones where it was just on a forum and some random internet nerds are doing Bitcoin transactions. At that point it had already surpassed. And then now it’s not like Bitcoin is going to fail because it doesn’t supposedly meet the regression theorem anymore. Right.

Bob Murphy:

Right. So yeah, so specifically what I said, and I left it up to the reader to say, you can say whether you think this means Mises was wrong or not, but what Mises had in mind and why at first it seems so clear that Oh yeah, of course, for something to become a medium of exchange, it must have had a prior history as a regular commodity, as he was saying, look, for a medium of exchange again, what does that mean? It means you’re willing to trade away valuable goods and services to acquire this thing. That’s the medium of exchange. Not because you’re going to consume it, not even because you’re going to use it in production, but because you’re going to trade it away in the future to get other stuff. And so really what you’re thinking is what I’m giving up for it.

Bob Murphy:

Now I would be willing to give up for the things I’m going to get in the future when I spend this. Right. And because you’re really making like an intertemporal trade in your mind, and this thing is just the medium to effect those trades, right? That’s what the term medium, like sound is a medium through which sound waves travel. It’s just showing. This is the good through which this intertemporal transaction takes place. It goes through. And so you’re really selling today’s labour for the cars next year when you’re getting money and start saving it and then using the money to buy the car a year from now. And so Mises’ point was how can that work? The only way that makes sense is if you know what the purchasing power of that good is, right? Cause if not, if this has never been, if it’s not currently a good that’s being used in barter, that we have some idea of how much is this trade for in terms of apples and oranges and horses and chickens.

Bob Murphy:

Well, then it doesn’t make sense to say, Oh, would I be willing to give up my hours of labor or give up my chickens to get this thing, because then I’ll use it to go buy other stuff with it. How would I know whether that’s a good deal or not? If I don’t know what it trades for. And so that’s, that’s kind of his point is that it needs to have been a commodity, not because of some metaphysical reason. He just meant because people need to know what is its market value against other goods and services to be determined. Does it make sense for me to take this thing and trade, even though I can’t personally use it. Right. So that was the idea. So that’s why he thought it had to have this prior history before it was adopted for its possible use as a medium of exchange.

Bob Murphy:

And so with Bitcoin, why that wasn’t a log jam was because in the beginning, yeah. Right. When it’s first, the white papers published and people have it on internet boards or whatever. Nobody knows what the heck is this thing worth. It’s not worth that there’s no history and people thought it was kind of a neat thing. And yeah, some guy on a lark said, okay, yeah, I’ll give you two pizzas for 10,000 or whatever the thing was. And so you could say to that guy, well, why would you do that? Why would you give up two perfectly good pizzas for these things that you have no idea? On the off chance it takes off? Or I don’t know, just because it’s cool or I’m a nerd, whatever, you know what I mean? Like I only gave up two pizzas who cares?

Bob Murphy:

So you see, I think that was the thing that Mises didn’t fully agree is that the thing might have an extremely low purchasing power early on to just get off the ground. And then there is a history and then people can start going from there. And so I think that was I just, so my personal take is I think Mises was wrong. And he didn’t think of that possibility that yeah, it could start if it had a really low purchasing power and the reason he didn’t think that is because like, it wouldn’t make sense with shells or something. You know? I mean, if someone just picked up a shell and said, Hey, everyone, let’s use this as the money. It’s instead of trading your valuable stuff for stuff, you actually want, trade it for these shells that are useless. And then like, why would I give them a horse for a bunch of shells and go, Oh, because you can take the shells and go get what you want, because we’ll tell that guy to also give up his good stuff for shells he can’t use. And that was something the stupidest idea ever. Right. But that’s because the shells aren’t particularly useful. Whereas Bitcoin, of course the reason they thought this might take off is because of its attributes and how, if we could get enough people using this, look at how versatile and…

Stephan Livera:

Useful it would be. Yeah.

Bob Murphy:

Useful it would be as opposed to just some shells that nobody cares about.

Stephan Livera:

Yeah. I like that analogy. It’s funny. I’m curious as well. What other things are there that you, I mean, you probably see a bunch of Bitcoiners spouting off on Twitter or whatever, what things do you think other Bitcoiners are getting wrong? Maybe one example might be one might be like, money is not a measuring rod. I’ve seen you make that point or I’m, I’m curious as well. So you’ve got any other things that you think maybe Bitcoiners aren’t quite getting right about Austrian economics.

Bob Murphy:

That’s a good one. Can we defer that one? I just want to hit that also. I need to let it germinate for a minute cause I forgot exactly why it isn’t the metric to me though. Cause it’s so seductive. Cause I wrote a thing on with there were some, there were some prominent like supply side economists who were, when they were battling against inflation were saying, how money should be a measuring rod of value, just like the ruler and when the government debased the currency, it’s like they see a foot has 15 inches and that’s crazy. And actually, even though you get where they’re coming from and their heart’s in the right place to warn about the basing, the currency and how you can’t do economic calculation, if money’s value is so uncertain that, but actually Mises wrote a lot about no money is not a measuring rod of value. And that’s the wrong way to think of it. So why don’t we come back to that, but let me just make like some more fun ones. And I’m actually curious to get your take on this too. So me as an outsider, I noticed this was two things. So originally people were saying how, Oh, this is the wave of the future. This is so awesome because it’s this anonymous thing and you can’t be traced. And then when authorities were complaining about, Hey, drug dealers are using this some Bitcoin defenders said “what are you talking about? It’s a public ledger. This is actually much easier to trace your transactions in Bitcoin than even using cash.” So that seems weird. And then the other one was the proponents of Bitcoin early on were saying this isn’t about personalities.

Bob Murphy:

You know, nobody can, can hijack the system. You don’t have to trust anyone. It’s a peer to peer, there, there’s nobody in charge of Bitcoin. It’s beyond human control. That’s the beauty of it. And that’s why we should do this rather than anything else. Even Hayek’s vision of privately issued currencies, technically that company could screw you over. And then later though, it was when there were arguments about like Bitcoin versus Bitcoin cash and other forks and this and that, like the two communities would be yelling at the other ones and saying, they’re ruining Bitcoin. I can’t believe these idiot are going. It was almost like we were having an election in between the two camps. And I was like, wait a minute. I thought human person that had nothing to do with it. You know? So I know those aren’t literal contradictions, but I’m just curious.

Stephan Livera:

Yeah, sure. Happy to. Yeah, of course. So for the first one, Bitcoin being private now the reality is Bitcoin is somewhere in the middle, depending on how you do it. If you are more technologically savvy and you know how to use TOR and use coin join and various privacy techniques, you can be more private, but to the so-called contradiction, I would say it depends on who you’re talking to because there are some people who try to sort of make Bitcoin fit. You know, they try to make it more palatable to people in the government. And for that reason, there are some people out there trying to say, yeah, look, see, it’s all a public ledger and therefore it’s not good for criminals and blah, blah, blah. I just think that’s not the consistent way to go about it though. I think of it more like we should bite the bullet.

Stephan Livera:

We should just say, look, I’m sorry, it’s a neutral tool. Some people will use it for good. Some people will use it for bad and that’s the way of the world. And I’m sorry, that’s just how it is. On that same point also, I think it’s also from a libertarian point of view, we would point out that there’s also a bit of regulatory capture going on because there are certain chain surveillance firms in this industry who want to try and market their product as though, Oh, Hey look, see, I can help you track track things on the chain, blah, blah, blah. To try and help appease, for example, AML regulators, anti money laundering or sanctions. And so on financial quote unquote financial crimes regulations, right? It’s the typical one there. So I guess the way I would resolve that is I would say let’s bite the bullet.

Stephan Livera:

I think it’s a neutral tool and we should just accept that. Yeah, look, the reality is right now, most of the crime is actually being done with the USdollar, not with Bitcoin, but you know, I buy the board there and I say openly, yeah, I think there will be criminals who use Bitcoin, but Bitcoin is the money of enemies and we have to accept that. And we have to just openly say, yeah, I’m sorry, but the net benefit of Bitcoin is going to be so much greater that okay. Even a few criminals using it is not going to you know, it’s going to be a net benefit, great net benefit to society, obviously to stop free out inflation and stop central banking, blah, blah, blah, like longer term to the second point about nobody can hijack Bitcoin. Now that’s an interesting one as well.

Stephan Livera:

So again, this depends on where your view in obviously I was more on the small blocker side and I was more anti BCash. Right. But I think it depends on, I think part of it is Bitcoin is not impossible to change. It’s just extremely, extremely, extremely difficult to change. And I’d say that’s probably the first part. And I think the other part is it depends on which view you take because there are some people who take the view of more like we knew that was going to fail. We were just trying to help you understand why that was a bad idea. And that’s why the network should not have gone there, but I can sort of see where if someone who’s not sort of deeply into the nuance of it, that it can be a bit challenging. But a really interesting book is called, I forgot the exact name, but it’s by Jonathan Bier from BitMEX research.

Stephan Livera:

He read this book called The Blocksize War. And he really catalogs and shows exactly those last few years in terms of, I think sort of 2015, 16, 17 culminating in 2017, obviously with the whole B-cash SegWit, 2X and all of that stuff. But I think that’s probably the main, yeah. So I would say it comes down to Bitcoin is not impossible to change. It’s just extremely difficult to change. And the changes that are, if you will possible there’s a range of those, right? Obviously I think anyone trying to change the 21 million limit, that’s a non-starter that’s like not even going to get out the door because like literally you’re going to basically make all the current holders have to de-value their own. They’re going to have to dilute their own share of Bitcoin. It’s just not happening. Right. It’s just a non-starter, that’s how I would say,

Bob Murphy:

Well, can I ask you? And I apologize. I don’t know if like, if your audience is so savvy that this is like stupid for them to hear. But if I share our conversation with like some of my fans that they won’t know this stuff, so if you don’t mind me, can you just spell those? So we can see sometimes the way people talk, it’s like, Oh, in order to break the 21 million thing you would need a super computer that was older than the age of the universe. But on the other hand, it’s like, Oh, wait a minute. We realized there was a problem. And so they made this adjustment to the Bitcoin protocol and everyone downloaded the new software. I was like, Whoa, wait a minute. I thought so strictly speaking, could it be, is it mathematically possible that all the miners could go in and say yes, that there should be now twenty-five million Bitcoin. Gotcha. And could they do that?

Stephan Livera:

No, so the answer is, okay. So think of it this way. Everyone running a Bitcoin full node is verifying and miners are helping secure. They are providing hashpower to help secure the chain, but their power is not of validity. Their power is one of transaction ordering. And so in this case, they’re hypothetically, if the miners all tried to make a fork of Bitcoin and only mine the 25 million fork of Bitcoin, all the Bitcoin node runners who are holders and not necessarily miners, they would just reject that. And then they would be basically, we can think of the miners. They’re kind of like security guards. So if the security guards say you’re some millionaire and then like the security guards say, Hey, we’re going to go God, that other house over there. Well, you’ll just hire some new security guards. That’s kind of the, I guess you get what I’m saying?

Bob Murphy:

It’s possible. I misspoke. I didn’t mean, I didn’t mean to, I was trying to say, what is the relevant community like clearly, if everyone who has anything to do with Bitcoin agreed. Oh yeah. I used to think 21 million. That was a non-negotiable point, but I’ve seen the light and that it should be 25 million. That would be better for all of us. Could that conceivably happen even though you’d think that no, that’d be there. They would never agree to that, but could it, Oh, okay. So it is, is it technically possible? is what I mean.

Stephan Livera:

Yeah. So yes, it would be technically possible. That’s every, you went around to every validating Bitcoin node user and every holder and that they all somehow, like, if you could get them to agree, basically the point here is could you get them to agree to dilute their own supply? And I, what I’m saying is that in practice, it would just be completely a non-starter like, that would just never, you would never like, because what are they going to get out of that? What are they going to get to that like, Oh, I just dilute my supply and for what?

Bob Murphy:

So yeah. I mean, just cause we’re doing this type of thing, I suppose what, the way you would have, it would have to happen is it’d be like a stock split and be like if you said to everyone, we’re going to proportionally increase it, or let’s say we made it 42 million, we’re just going to double everybody’s holdings because right now the purchasing power is too high, even with the satoshi thing. And we just want to cut the price of a satoshi in half just to make transactions easier. We’re just going to do this thing. And you know, you’re always gonna have double, so you have the purchasing power will be cut in half but you’ll have twice as many.

Stephan Livera:

So I think in that case, people would more, I think the conversation would be more about how do we subdivide further. So if there’s 21 million Bitcoin like, the number, the actual number is a bit less than 21 million in the year 2140 or whatever. Right. But just taking that for stipulation. And then each Bitcoin has 100 million satoshis well, for example, the lightning network, some clients have that do denominate in Millisatoshi. So even a fraction already down. So basically I think the answer would be that we go smaller and smaller fractions of Bitcoin than to do a quote unquote stock split.

Bob Murphy:

Right. So by the way, I agree with you that I think just the culture and ethos of Bitcoin and what it’s supposed to be like, that’s such a better, I mean, it’s sort of like going up to NRA members and stuff and saying, what if we made, we construed the second amendment to mean you could have a water pistol and they would say, no, that’s not, you know what I mean? So they might some of the, and especially NRA, cause they’re, wishy-washy might be okay with banning fully automatic weapons and things, but they would never agree that yeah, water pistols is all really, the second amendment meant like the, to me, that’s kind of like what it would be like to try to get.

Stephan Livera:

Exactly. It’s just kind of like, it’s just not.

Bob Murphy:

But strictly speaking when sometimes when people make it seem as if it’s literally mathematically, I might’ve been one of them, like I think I have used phrases say like, Bitcoin’s a harder money than gold because technically an asteroid could come to earth that has a bunch of gold on it or somewhere we can go get it, or the scientists could figure out in the lab how to turn other baser metals into gold, just with a low cost process.

Bob Murphy:

Whereas with Bitcoin, it’s mathematically fixed to 21 million. And so you know the context in which that’s a true statement, but strictly speaking, they could change it. And maybe from our perspective, we’d look and say, well, that’s not Bitcoin. That’s something else, but they might call it. Right?

Stephan Livera:

Yeah. And I think most, a lot of people would say that you’ve changed the protocol at that point. And it’s no longer Bitcoin.

Bob Murphy:

But still it’s conceivable that the people, you could go take a time machine and go to the year 2300 and it’s possible there would be a billion Bitcoins being traded and everyone calls it Bitcoin and thinks that no, no, this is the descendant of what you guys invented in good job, by the way, did you guys ever figure out who Satoshi was? And you might be horrified and said, what’d you guys do, but technically that is possible.

Stephan Livera:

Yeah. I guess theory, it’s one of those things where it may be theoretically possible, but just in reality, it’s just like such an infinitesimally testimony. Like just, it’s not even worth entering,

Bob Murphy:

But I guess it’s just to like, to show people that technically there is some human control over what happens with Bitcoin, but it’s dispersed throughout the community. So it’s sort of like trying to get, to me. I don’t know if you like this analogy. It’s like I said, technically like the English language more silver time.

Stephan Livera:

Oh, of course. Yeah. I’ve heard this analogy. Yeah.

Bob Murphy:

Right. But if we said in the year 2200, imagine if the word Up meant down and moving towards the floor, that would be kind of weird. And you just say, I really doubt that would happen. You know? So it might be something like that.

Stephan Livera:

Yeah, I think it’s kind of like that. And I think, I mean, I’ve heard your analogy as well on the market for security, thinking about law as kind of like dictionary, like imagine law and dictionaries and language and stuff like that. Oh. And then we should also get to the money is not a measuring rod point as well, because I think that’s an interesting one because I think a lot of, if you’re technically being precise as an Austrian, it’s more like money is not neutral and our demand to hold it will shift. And I think that’s also why the purchasing power of that value will really shift. And so we can’t just say, Oh, this is now the measuring rod of the world. It’s I don’t think that’s quite precise, but what do you think?

Bob Murphy:

Right. So I just looked up to refresh my memory. So it was, Steve Forbes and I think he had a co-author I think it was Elizabeth Ames had a book on money and you know the fed was debasing the currency or whatever, how to return to sound money? And there, they were saying money should be a measuring rod, just like a ruler. And again to allow currency debasement is like allowing to say that 18 inches for a foot of thing and you can see how that would screw everything up. And so David Gordon of the Mises Institute started reviewing that book. And so they had, it’s got some great stuff about dangerous of government, but actually this point here is wrong. That money is not a measuring rod of value. And then Mark Miles, who was an economist trained by Arthur Laffer.

Bob Murphy:

So Mark Miles is like a supply siders. So you can see why he likes Steve Forbes. They’re all tax cuts for the wind kind of mentality. So he was aghast. I’m like, how the heck does David Gordon? And this is basic stuff like couldn’t believe how could someone write for the Mises and still not know this has standards, any Austrian should agree. And then I had jumped in to say, no, it’s a technical point, but David Gordon is right. And you guys are missing it, so the issue is just in terms of subjective value theory, money, can’t possibly be a measuring rod of value. So to say a measuring rod, like literally what is a measuring rod it’s because length is an objective feature of the world. And so we know like what we mean by a foot? You know, there’s some rod somewhere in a museum like in France or somewhere.

Bob Murphy:

That’s where the meter is. I don’t know where they have over. They define what the foot is to say, this is what we mean by a foot. And then nowadays they give more precise definitions too, based on chemistry or something, but we know what we mean by a foot. And then you try to build things that are the same physical. And then you use that. And then to say, how many feet wide is my yard? You technically take this thing and you lay it end to end. You said, that’s what it means to say, this is 32 feet wide. And so when you say like, Oh, this car traded for $10,000. So did that price? Does the money somehow measure how much value is in the car? That doesn’t make any sense that no, all that really happened is this person traded $10,000 in cash and this person traded a car.

Bob Murphy:

And why did they do that? It wasn’t because there was some sort of equality. The guy who gave up the cash thought the car was more valuable than the $10,000. That’s why he agreed to the trade and the seller, the seller thought vice versa. He thought that $10,000 in cash was more valuable than the car. And that’s why he agreed to the trade. So there is no equality there. The $10,000 equals the car in any sense, it’s both parties, they just had different values. And that was what made the trade go through. And then another way to see it is, cause I think Steve Forbes was a fan of the gold standard. And so was Mises, so let’s say we we had it locked in that the you know, the dollars $20 and 67 cents an ounce back what it was like prior to world war one.

Bob Murphy:

And we just kept it like that. And so I think the Forbes is saying, ah, back in those days in the classical gold standard, the dollar was a measuring rod of value because it was fixed. But suppose there’s a huge discovery of new gold or an a an asteroid comes and the amount of gold in the world doubles. Well, yes, it’s true. That dollar fixed in terms of gold would not change, right. They would still be $20 and 67 cents because the US government would, would stay true to its pledge and keep the dollar defined as a certain number of grains of gold or whatever. But because now there’s twice as much gold, gold value, Market value relative to everything else would be lower, right? There’s more gold floating around. And so the gold, the price of stuff quoted in gold ounces would go up.

Bob Murphy:

And so if a dollar is locked in, in a certain ratio to gold, that means the dollar prices of everything would go. They might not literally double, but they would go up a lot. And so to the average person, looking around the dollar prices of everything they buy would double. So that would feel like inflation to them, even though the, you know what I’m saying? It’s not that all of a sudden everything on earth became twice as valuable because that dollar locked into gold at that ratio was measuring the value. You’d say, Oh no, it’s just the currency got debased. And Steve Forbes, or no, it couldn’t have, because the dollars. And I said, well, no, because the amount of gold just suddenly unexpectedly doubled. And so anyway, that’s kind of the argument I used to try to just drive home that the dollar, money is not a measuring rod of value.

Bob Murphy:

When you think through subjective value theory, that literally doesn’t even make sense. And then moreover, just practically speaking, you can just come up with hypothetical exaggerated examples to see, even if you had money defined in terms of precious metals or whatever, that’s still not getting you what you think you’re getting and going the other way too, if all of a sudden like people thought. So again, the dollar let’s say it’s locked into gold at $20 and 67 cents an ounce suppose just for whatever reason, like people decide that gold causes cancer or that they just, they think gold is ugly and no one wants to use it for jewelry anymore. Likewise, the demand to hold gold for these other purposes would drop it’s value relative to other goods it would drop. And so hence the dollar would drop. So the dollar prices of everything else would go up.

Bob Murphy:

So what would happen in practice in case the listeners are getting lost is people wouldn’t want to spend if they had an ounce of gold, something that costs $20 and 67 cents. Now that the gold you know, they, they don’t think it’s as pretty anymore. They think it’s radioactive is causing cancer. The seller would say, Oh, no, I don’t want that ounce of gold. I don’t want get rid of, I’m not taking that. You’d have to give me two ounces or something to make it worth my while. And so they would just go to the central bank, to the US and say here, give me, give me dollars for this goal, because the sell the dollars aren’t causing cancer. And so now there’d be a huge influx of gold into the coffers of the bank.

Bob Murphy:

And they would be committed by law to have to give $20.67 in new currency. So that would cause the amount of dollars circulating to go up. So that’s the mechanics of what would actually happen under the classical gold standard. If all of a sudden people didn’t want to hold gold anymore, they would just turn into the authorities what they consider to be a bargain price at that time. And so now the amount of dollars would all of a sudden shoot up. So historically the reason the gold standard was so good is those crazy scenarios didn’t happen. There wasn’t like a huge asteroid came. It wasn’t that all of a sudden gold was found to be causing cancer. People liked it. And so it limited how many dollars the government and Francs and British pounds and whatever the authorities could print if they were committed to the gold standard. And so it was a check on printing up currency, but again, it’s not because it was a measuring rod of value. That’s just not, that doesn’t make any sense.

Stephan Livera:

Yeah. It’s not precise. And I think it’s it’s yeah, it’s more important to kind of have that. And speaking of acting as a check on the size of the government, I think potentially assuming like if more and more people started to adopt Bitcoin and you could see a scenario where maybe 10, 15 years, 20 years later, if more people are holding Bitcoin, does that then make it more difficult for the government to fund itself using cheap debt. And is that in essence? You know, because I think this is a topic where I feel like a lot of libertarians are missing the point and they’re not understanding that Bitcoin can actually achieve a very libertarian outcome of making the state smaller by forcing it to explicitly tax us, instead of being able to push the cost into the future with cheap debt. What’s your view on that whole idea?

Bob Murphy:

It’s been a while since I’ve thought through that. Originally I was really optimistic. And then when I talked to someone, who explained the mechanics of how Bitcoin worked, I thought, Oh, it’s not going to be a silver bullet. Like in the next 10 years, like at first I just thought it might be this way that the more of us who start using Bitcoin, we can like send purchasing power to each other. And the authorities can’t stop as long as you just get on the internet. But then I was thinking well, no, I mean, they could do things like say anyone who’s caught trading Bitcoins goes to jail and then they could even if they couldn’t catch you, if they cut the service provider that kind of stuff. So I realized like just piecemeal, guerrilla operations kind of thing.

Bob Murphy:

It’s not that we could just totally have a dark economy using Bitcoin. Like there would still be ways, but I do think that, yeah, if like the whole world, all of a sudden just started using Bitcoin and that was now the money of the world that, yeah. Then the governments, they wouldn’t be able to inflate. Like it would just be sort of an off limits thing. And they would have to just deal with the fact that there was a sound money. And so they could still do all the other things they could tax you they could point a gun at you and say, give me some of your Bitcoins, or how much did you earn last year? Well give me half of it. They could still do that and throw you in a cage. But in terms of them being able, just to go buy fighter jets by printing up dollars, they wouldn’t be able to do that.

Bob Murphy:

And also they wouldn’t be able just to issue debt so they could, nothing would stop them from issuing debt, but without having a central bank there to monetize it, interest rates on that debt would go up just like nothing stopping a company right now from issuing more bonds. You know, there’s no legal constraint, but if they do too much of it and investors start thinking, well, how are you guys going to pay this off? Then the interest rate they charge is going to go up. And so there’s a natural inbuilt limit. So if ironically, the MMT camp they talk about a country being a monetary sovereign. And what they mean is not only, it’s not merely that this was a necessary, but insufficient condition, that they issue a fiat currency. It’s also gotta be that they don’t tie it to anything sort of the classical gold standard that wouldn’t count.

Bob Murphy:

And also that they, they only borrow in that debt denominated in that currency. And so that’s why like Venezuela or something, if it hit outstanding US Dollar denominated debt, them printing money, hurts people because then, you know and so if he’s thinking it through that, the more people that use Bitcoin as their their day-to-day currency that would take away that what the MMT campers mean by monetary sovereignty from more and more governments, where exactly, yeah. They can print up these things called dollars, but it’d be like the Zimbabwe government just printing up and it just crashes against it. Whereas right now the Fed can create 5 trillion, new dollars in the markets kind of absorb it. It’s not the per dollar value just goes down proportionately. So there’s no point to it.

Stephan Livera:

Yeah, of course. And I think the way I guess to reflect the way many Bitcoiners are thinking about it is, I mean, we joke about it friend Saifedean we call it Saifedean calls it number go up technology, right? It’s this idea that it’s so scarce and you can’t make more of it. Right? So this Julian Simon idea that anything we want, we humans can make more of it except with Bitcoin, obviously. And so over time, if Bitcoin is going to be going number going up and then people who stay in Fiat, or let’s say some central bank, digital currency coin, or whatever is constantly going down, if more and more people start running to Bitcoin, and then it becomes more like a hard money Bitcoin world. Then I think that substantially shrinks the size of the government because right now, part of how they can achieve this is using cheap debt. And, I think we are moving into a world where it is going to be more equity based as opposed to cheap debt-based. So I’m wondering whether you see any like, I guess from a, like a broader macro view, do you see it, that being a potential thing, if people move more and more people get into Bitcoin, do you think it would be a more equity based world as opposed to debt funding?

Bob Murphy:

Yeah, I do think so. I mean, I would want to think about it more like before I really took a strong stand, but yes, I think that’s true. And you’re right. I mean, I’ve written not in the context of Bitcoin adoption, but just in general, about how, why is it that we’re such a debt based economy? And it was really bothering me, like in the wake of the financial crisis, lots of like Paul Krugman especially, were writing and saying things like, Oh in order for the private sector to de-leverage, you need the public sector to take on more debt, otherwise incomes go down. And I was just coming up with simple thought experiments to just show counterexamples and say, no, that’s not true. And they had to do with equity that they just assume that Oh, gee, for this guy to reduce his debt somewhere else in the community must be increasing their debt or it doesn’t work.

Bob Murphy:

And it’s like, no, you could be increasing your equity. And you know, so you’re right. That it’s people, I think when they’re thinking about claims, I guess that’s the issue that when someone issues a debt claim it’s like, Oh, this person has an asset, but it’s someone else’s liability. Whereas with equity, it’s your asset. And there’s nobody in the community whose liability it is. If that makes sense and so, and people were not getting that. And that’s the sense in which we can all have more greater financial assets. It’s not just a zero sum game and yet the way some people were writing both MMT camp and even the just standard new Keynesian, like Paul Krugman camp is that it seemed like they were thinking that that wasn’t possible. And you know, you get the stuff, I’m sure you’ve seen it with the MMT are saying, Oh, the public debt is good because the only way to get net private saving is for the government to increase its debt.

Bob Murphy:

And that’s just not true. You know, Robinson Crusoe on an island can have net private saving. So once you unpack what they mean by net. Yeah, it is true, but that’s because that’s a stupid term. You know what I mean? It doesn’t mean what it sounds like. It means they’re making it sound like if the government doesn’t run up a deficit, then the people in the private sector, can’t all be saving. It’s only like one guy saves and another guy increases his debt or dissaves, and that’s not true. And like you were saying, equity has a lot to do with it. So that’s my long-winded way of saying, right. I think there’s some weird intellectual shortcoming where a lot of people have convinced themselves that debt finance is the way to go. And that it’s the only way that capitalism can work. And that’s just not true. You can have equity finance, and it’s a lot safer and for obvious reasons and that yeah, probably having hard money being the standard would certainly help in that regard and implement that, incentivize it. And so certainly the more people use Bitcoin. Yeah. So I’ve kind of convinced myself while we’re talking here that yes. I agree with you. The more people who use Bitcoin, probably the less you would see debt financing and more equity financing.

Stephan Livera:

Right? Yeah. And I’m curious as well, whether you have any thoughts and I don’t know, you’ve got your, this was your graduate thesis as well around interest rates. And because I wonder in that kind of world, it might be that know if you want it. And maybe there’s a lot less, a lot, lot less debt, but you have to pay much, much higher interest costs for that. I’m wondering what you think on that idea or should it be is it more like the PTPT, right. Pure time preference theory of interest. And that, it’s more just like, it’s just a reflection of people’s time preference. So if they have a very low time preference, then they on average are willing to have a lower interest rate because they’re willing to forego their consumption. Whereas if they’re high time preference, then you would think their interest rates that they would charge someone is higher because it’s costing them more. Right.

Bob Murphy:

Right, so let me answer this way. I think if everybody were using Bitcoin where the money and that’s everything was denominated in Bitcoins and especially, we know once we hit the 21 million or like you say just under asymptotically get close to it that the normal state of affairs would be priced deflation. So the price of cars and houses is quoted in Bitcoins would, it was certainly cars, maybe not houses, but certainly cars and food would go down clothing, newly produced goods each year that have a short lifespan. Those prices quoted in Bitcoins would go down over time because the quantity produced each year would typically go up. And then with a given thing, and that certainly is more, more people are born the fixed number of satoshis has to get, and so they have to have a higher purchasing power, just so everybody’s got a decent amount of purchasing power with that finite amount just getting redistributed around.

Bob Murphy:

So each person claims holds less and less actual satoshis on average as the population rises. So that would have to happen. And so I think you would see real interest rates would be higher than they are now, depending on what numbers you look at, in some cases negative or close to it. It’s so I think you would see that, and that would just show that there’s real money involved in that sort of logically make sense. The intertemporal exchange rate would be positive as it were like to to take goods from the present of the present goods command a premium or future goods. And that sort of like goes hand in hand with a positive, real rate of interest. And so, but the nominal rate wouldn’t have to be as high because prices are dropping. So you would know that the, yeah, if I’m going to give up a hundred satoshis today, I only need to get paid back 103 next year, because things are going to be cheaper anyway.

Bob Murphy:

So they’re going to be so that the satoshis I’m getting paid back with next year buy more stuff than what they could buy when I gave them up. So there’s that natural appreciation. So it’s the opposite of what happens. Now, if you give up a hundred dollars and there’s, someone’s going to give you 103 next year, you’re like, Oh, but I’m only, that’s not going to buy as much. And so I might be even be losing money if inflation’s higher than 3%. So that’s why you got to add a price inflation premium. This would work the other way around. So I think there’s two countervailing things on the one hand, the real interest rate would be higher because I think it just makes more economic sense in that regime. And so that would encourage saving by the way too. That’s why you would defer consumption, because you’re getting that real interest rate, which is healthy for productive long-term growth, but the nominal interest rate might still be pretty low, just because again, the prices keep falling measured in Bitcoin. And so, if you’d be willing to part with it, because you knew what you’re going to pay it back, it’s going to have more purchasing power.

Stephan Livera:

Yeah. That’s really fascinating to think about. And even I’ve also read and seen other ideas that historically there was more patronage because people reached a saturation point in terms of what they could invest in. Whereas when we’re living in this fiat financing world, there’s this always more and more projects that they can just throw money at. Whereas historically they might’ve been more about, okay, I’ve kind of hit a certain saturation point in what I can invest in. And so now I’m actually just going to start funding various arts and projects and building a big cathedral and things like that. Is that something you’ve seen as well in your kind of studies?

Bob Murphy:

So yes, it would. One thing too, is people would hold a larger share of their portfolio in the form of actual cash in that world. They would call the Bitcoins cash. And so, whereas now, again, because of price inflation you don’t, you don’t want to be sitting on actual hundred dollar bills in your home safe unless you’re worried about the banks collapsing or something, but in general, you don’t want to have a bunch of your wealth literally in currency, just because that’s crazy. You’re not earning an interest and prices keep going up, measured in dollar. So why would you do that? Whereas yet with Bitcoins, it wouldn’t be crazy to hold a bunch of your wealth in the actual form of satoshis because again, prices are coming down, it’s just giving, you’re earning a positive rate of return just sitting on cash, which is baffles most people.

Bob Murphy:

But that would be the normal state of affairs. And I think that, so this kind of goes to your point about equity versus debt. Like that’s less risky, you know what I mean, for people just to be holding, that it’s very liquid. In other words, you’re not putting your stuff in. And so you’re right. I think partly right now what’s fueling it. They use the phrase like people reaching for yield. And so the idea is that, yeah, when nominal interest rates are really low, like insurance companies, for example, life insurance companies they’re taking a premiums and they, they, they know there’s liabilities on their books that people are going to be dying over time or pension funds or whatever they’re taking contributions from the worker’s paychecks and they know they got to produce because when they retire, they got to have assets giving off income to be able to fund their retirement.

Bob Murphy:

If interest rates are really low in terms of safe things what’s considered safe, like treasury bonds and stuff, then you know, geez, we that can’t work. We can’t invest in treasuries right now because the rate of interest is so the yield is so low that, and so they get an, a riskier stuff. So yeah, I think that would totally be reversed in a hard money world, which we would have if everybody’s using Bitcoin. And so, right. A lot of these frivolous investments I think, would not happen also some of it is that there’s this selection element. It’s not so much just this, the given investor in the different regimes and the heel, because sometimes people say stuff like with the Austrian theory of the business cycle, like Oh, interest rates get pushed artificially low.

Bob Murphy:

And so entrepreneurs invest in malinvestments because — and people was like, what if it was something stupid? And they knew it was stupid at 8%, how come with the central bank pushes it to two? All of a sudden these savvy investors are, Oh, like don’t, they know rates are gonna rise down the road? But it’s not necessarily the same people it’s that if they push it down low enough, then maybe some joker comes in who borrows at the 2% to go buy the, you know what I mean? Because of the cheap money, it’s not merely the — it’s not the same borrowers and they just pay lower rates. It’s that the criteria for who is creditworthy also tends to get lowered during a a mania during a credit boom it’s. So it’s also that the borrowers are given huge sums of money who really shouldn’t be getting loans at all. And so they go in invest.

Stephan Livera:

Yeah. Have you heard that? I’m sure. You’ve probably heard that joke. Right. It’s not that entrepreneurs become idiots. It’s that idiots become entrepreneurs.

Bob Murphy:

I haven’t heard that. That’s a better way of summing it up yes.

Stephan Livera:

Yeah. Look Bob, I’m a huge fan. This is really great. I really enjoy chatting with you. I want to respect your time, but before we let you go, obviously, listeners, make sure you follow Bob and you know, you subscribe to his show. And yeah Bob, where can listeners find you and listen to you online?

Bob Murphy:

Sure. Yeah. Just I’ll point them to BobMurphyShow.com. That’s my podcast. And that’s got links to my other stuff, but that’s the main thing. I’d point people to BobMurphyShow.com

Stephan Livera:

Fantastic. Bob, I really enjoyed listening to you and reading your work. So it was a pleasure. And an honor to interview you. Thanks for joining me.

Bob Murphy:

Thanks. I appreciate it. Thanks so much. And I learned a lot from this talk as well, so thanks.