This article aims to summarize Allen Farrington’s triptych on Bitcoin (Wittgenstein Money – Capital Strip Mine – Bitcoin is Venice), upon which the book “Bitcoin is Venice,” published by Bitcoin Magazine and written by Farrington and Sacha Mayers, is based. Please note that this summary will likely not do justice to the amazing piece that is “Bitcoin is Venice.”
H.L. Mencken said of Henry Hazlitt that he was “one the few economists in history who could really write.” I am not sure Allen Farrington would consider himself an economist, but he is certainly one of the few who can really write about economics. When reading “Bitcoin is Venice,” one often forgets that the subject matter at hand is economics since the author masterfully succeeds in conveying economic wisdom with limited recourse to the jargon most of us find dull and soporific. Farrington doesn’t explain economics to the reader but rather invites them to reason about the subject matter from first principles.
In many regards, this is a philosophical piece. By that, I don’t mean that the author delves into abstract and indigestible discussions, but rather that he espouses the true methodology of the philosopher: from a concrete and real situation, namely the emergence of a challenger money (Bitcoin), he extracts a problematic and meticulously follows logical implications to advance toward the truth. As any true master of his subject, he doesn’t abuse the authority of the giant thinkers whose shoulders he stands on, but instead accomplishes the tour de force of re-demonstrating the core tenets of Austrian economics from the ground up.
“Bitcoin is Venice,” is everything but a lecture on economics. It is all reasoning, parabolas and colorful metaphors delivered in a playful language, which makes it an astonishingly pleasant read for both newbies and seasoned Bitcoiners.
The first part, “Wittgenstein’s Money,” opens with a proper Gedankenexperiment1 (thought experiment) about the hypothetical emergence of a new form of money. Such an inquiry naturally leads us to investigate the role played by the monetary institution. Why does it emerge in the first place? What function does it serve?
Instead of relying on the hackneyed tripartition of monetary functions (unit of account, medium of exchange and store of value), the author follows in Mises’2 footsteps and ties back the existence of money to the inescapable uncertainty of the future. Here the thought experiment consists of trying to understand how humans would act had they perfect knowledge of the future.
If we were to know exactly the economic conditions of the future, our future preferences and needs as well as those of every other person, we wouldn’t need money in the first place because we could easily produce and store the goods necessary to satisfy our future needs. Yet, as the future is unknowable, we are better off by storing a good that we know others will desire in the future, since we could thus satisfy our future needs through exchanges. Given that our fellow humans find themselves facing the same conundrum, and since we all want to be part of the widest exchange network possible, it’s in everyone’s best interest to store wealth (a crystallization of time and energy) in the same vessel.
Equipped with this praxeological3 understanding of the emergence of money, we can then get back to the original question: what would happen if some challenger money was to appear?
This would likely lead to a dynamical and messy process, where the challenger would gradually and erratically gain liquidity as the number of people using it grows. At first sight, the external observer wouldn’t confer on it the status of money since it would lack the usual monetary features. But this wouldn’t disqualify it as money altogether. Since value is subjective and because the world is not static, the semantic/theoretical conception of money should not really be a concern; what truly matters is the way real human beings act under the impulse of their subjective preferences. If some people use a challenger as money, or better so, if ever more people use it as such, then it definitely has the potential to become one.
Setting aside this core problem, Farrington then invites the reader to question what “preserving purchasing power” even means in the context of a dynamical world. As the world is constantly changing, it cannot mean the ability to acquire the same quantity of goods as before. More realistically, “preserving purchasing power,” should mean being entitled to the same share of the total output.
But, if we were to stop at that, we would miss a large part of the overall picture as we would implicitly consider that such variation in production output would be independent of the flow of money itself. It is certainly not the case, and so the author dedicates this second part to explaining how the characteristics of the money we use affect our decisions, and how this affects, in turn, the whole production structure.
Once the ability to provide for ourselves and our kin in the present, and in the immediate future, is secured, we can then focus our talents and energy on goals farther into the future. Hence, by changing our relation to time and uncertainty, money changes the way we see the world, and by extension, the way we organize ourselves within it. Goods are not exclusively seen as resources to consume, but also as productive goods, that is, goods that we can use to increase our stock of consumption goods.
This productive potential we then see in the resources around us is what we call “Capital.” By using money, we extend the scope of potential trades, we gain certainty, and can thus specialize ourselves (extension of the division of labor), which translates into more productivity, and hence, more capital accumulation. This capital accumulation then results in an elongation of the production structure, achieved through the division of each production processes into longer sequences of consecutive steps implicating more specialized tools — or what Austrian economists call “production roundaboutness” (Produktion Umweg)4, a phenomenon at the root of the advancement of civilization.
Said like this, within the abstract, this might seem quite elusive. But, in “The Capital Strip Mine,” Farrington employs a simple metaphor to distill this idea.
He compares the healthy economy, grounded in a sound and temporally salable money, to the farmer who sees their land as a potential for future production (capital), and depicts the corrupted economy, based on an elastic currency that cannot serve as a stronghold of wealth, as the strip miner who sees land only as a resource to plunder (blind consumption). Here, he analyzes how inflationary money, by enticing us to maximize present consumption at the detriment of future production, leads us to deplete the capital stock instead of nurturing and growing it.
In a nutshell, “The Capital Strip Mine” explains how recourse to fiat money condemns us to wasteful and meaningless economic activities, with one such activity being the financialization of everything. Indeed, the inexorable devaluation of fiat tacitly implies a never-ending increase in demand for alternative stores of value, which is met by the inexorable increase in the supply of synthetic yield-bearing financial instruments. To make things worse, such a financialization process is self-perpetuating: it feeds itself back in a self-reinforcing loop through the rehypothecation of genuine savings into a fractional reserve banking system.
Another often-overlooked consequence of such a savings-destroying monetary system is that it curtails our ability to take risks, i.e. finance true entrepreneurial activity. Indeed, savings, i.e. accumulated capital, is a buffer that allows us to engage in uncertain endeavors that might only pay in the long term, or not pay at all (remember, the future is uncertain).
But wouldn’t taking risk to build up a more complex and specialized production structure entail increasing future uncertainty, and hence defeat the very purpose of using money in the first place? Yes, but it is the price to pay for the betterment of our standards of living. So, it all comes down to accepting an affordable rise in uncertainty, in the hope that it will bear fruit in the future and ducking the unnecessary rise in uncertainty endogenously created by fiat. As the author perfectly summarizes: “Money emerges from uncertainty, capital emerges from money, and uncertainty emerges from capital.”
Now that the reader understands the subtle links between money, uncertainty and capital, and by extension the deleterious effects of fiat money, the stage is set for Bitcoin to make its grand entrance.
In the closing part of the triptych, “Bitcoin is Venice,”Farrington offers his grand finale of metaphors and allegories, by taking us to Ancient Greece, early Renaissance Venice, Islamic finance, and even outer space, to illustrate Bitcoin’s properties and draw the likely implications of its emergence for the future of our civilization.
In this last part, we leave the lands of theoretical economics and take a step back to appreciate, through the lenses of history, how previous monetary and financial innovations have transformed the exercise of violence, the allocation of capital and the conduct of trade, and hence, better understand how significant and transformative the emergence of a “global, digital, sound, open source, programmable money” might prove to our social fabric. Bitcoin might provide an exit from the current neo-feudalist global regime, in the same manner that financial and monetary innovations from the early Renaissance favored the ascent of city-states such as Venice, and thus helped precipitate the end of feudalism in Europe.
The natural fitting of such metaphors to Bitcoin will convince many readers that, less than a revolution, Bitcoin is a resurrection of the economic and moral principles that made the grandeur of our civilization.
Though interesting in the absolute, those comparisons between Bitcoin and Ariadne’s thread, or a black hole, are just a detour leading us to the real conclusion of the piece. After having mocked the semanticists for their static view of what money is, Farrington follows his own predicament in refusing to give further substance to any of the metaphors just laid out. Loyal to its philosophical method, he answers his opening problematic by remarking that the very existence of the discourse about Bitcoin’s essence indicates that no static theory of money could explain how such an institution emerged in the first place. For all we know, the messy process of Bitcoin’s adoption could well indicate that the rise of a new “global, digital, sound, open source, programmable money” is unfolding before our very eyes.
In these matters, semantics and abstract arguments will only get us so far and might often mislead us. All that counts are individual actions. Hence, he concludes that Bitcoin is many things to many people, but that it doesn’t really matter, because the very fact that Bitcoin is trumps it all, as it demonstrates that there was a latent demand for it.
This is a guest post by Theo Mogenet. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
- Gedankenexperiment, or thought experiment is a hypothetical situation in which a hypothesis, theory or principle is laid out for the purpose of thinking through its consequences. This method of reasoning is central to the Austrian methodology.
- Ludwig von Mises, “The Theory of Money and Credit,” 1912.
- Praxeology, from the Greek “praxis,” is the distinctive method of the Austrian School. The term was first applied to the Austrian method by Ludwig von Mises, who was not only the major architect and elaborator of this methodology but also the economist who most fully and successfully applied it to the construction of economic theory (see Human Action, 1949 in particular)
- “Capital and Interest: A Critical History of Economic Theory,” Eugen von Böhm-Bawerk, 1884.