Renowned Economists on Crypto

The underlying precepts of how people use money today can be summed as human transactional behavior. Economic literature and academia chronicle human understanding and interaction with transactional behaviors. But how did people get to using U.S. dollars and digital iterations to pay for everything?

This academic-style article will explore the question if cryptocurrencies and decentralized finance (DeFi) markets are the future of the global economy by drawing on the perspectives of a range of renowned economists.

The future of cryptocurrency globalization will be specifically explored through Friedrich August von Hayek’s economic thought. Hayek’s assertions beautifully play into the forthcomings of DeFi and the transition from Keynesian to Hayekian economics.

What is the History of Money?

A plurality of materials are available to assist someone in understanding just exactly what money is and its history, but here's the gist — humans discovered money as a solution to the challenges of barter, which economists refer to as the “coincidence of wants” problem. 

Human civilization came to the conclusion — to a Schelling Point (a game theory concept made famous by Thomas Schelling) —  that gold is the ideal form of money because of its utility, scarcity and luster. Throughout history, humans have repeatedly learned how to centralize authority over gold and inflate its value above its natural historical inflation rate of 1.5% to 2% (the quantity of gold added from mining). This moral ambiguity most recently occurred with the establishment of the U.S. Federal Reserve in 1913, the worldwide agreement to use the gold-backed dollar as the international financing method in 1944 and Nixon's departure of the U.S. currency from the gold standard in 1971.

Ever since then, financial institutions all around the world, such as the United States Federal Reserve, have repeatedly inflated their respective native currency. The institutions make it appear innovative by employing ambiguous jargon such as transitory inflation; however, the concept is anything but novel. It essentially amounts to producing extra fiat dollars out of thin air and lending them to large banks.

What is Fiat Currency?

Fiat money is a form of money that has no inherent value but is recognized as a medium of exchange by the government. Historically, currencies were underpinned by actual resources such as precious metals, but fiat currency is dependent on the distributing government's credibility.

Fiat currency was presented as a solution to commodity coinage and representational currency, and its value is determined by market forces. Commodity coinage is made up of materials such as gold and silver whereas representational currency is a hold on an acquired commodity.

The notion of fiat money first occurs in a hypothetical inquiry in a publication by the English philosopher John Stuart Mill in 1848. What if the government paid all wages with non-gold-backed paper money? Money’s value “would depend on the fiat of the authority” (Mill). The word "fiat currency" refers to the money you use every day. 

The United States dollar, like other modern currencies in circulation across the world, is a fiat currency. The value of fiat currencies is often sustained by a government's economic strength. Again, this type of currency is distinct from asset-backed currency, which gets its value from an underlying asset. 

How Does Keynesian Economics Relate to Crypto?

Keynes played a significant role here by establishing intellectual justi­fica­tion for government and central bank inter­ven­tion during reces­sions through monetary policy (interest-rate reductions) and fiscal policy (government spending).

The difficulty is that it is simple for monetary authorities to cut interest rates, issue bonds and spend it in the face of depression since it is typically a common thing to do in the short run, but Keynes' counter-cyclical policies, such as raising interest rates and taxes while the economy is expanding, are less popular and frequently do not occur. Keynesianism lends credibility to the notion that a few people can effectively enhance the function of money circulating in the economy by managing it, which is how the economy of today operates.

Effectively, economic recessions, according to Keynes, are caused by insufficient aggregate demand. Higher aggregate demand is thus the antidote to recessions. And the most effective method to boost aggregate demand is for the government to raise spending until the economy is restored — that is, until full employment is achieved. 

This Keynesian perspective is widely held. It appears to make perfect sense. However, it has significant limitations. Its concentration on aggregate demand is likely its worst shortcoming. Keynesian economics ignores the crucial (microeconomic) aspects of an economy by focusing on aggregate demand. These crucial elements include how effectively or badly each of the economy's numerous different parts fit together and function together to provide goods and services for customers and job opportunities for employees.

How Does Hayekian Economics Relate to Crypto?

One of Hayek's most profound ideas is that the signals received by private property owners on how to effectively use their property are mostly in the form of pricing — the prices of certain possibilities in comparison to the prices of others.

“The price system is just one of those formations which man has learned to use (though he is still very far from having learned to make the best use of it)”

-The Constitution of Liberty pg.524

 Each private-property owner seeks only the best returns on the use of his or her property, resulting in a general economic order as each owner steers his or her property toward uses that pay the highest prices. Similarly, consumers seeking maximum happiness from their expenditure shun inefficient providers (those with relatively high costs) and prefer efficient suppliers (those with relatively low prices). 

Suppliers who are inefficient must either improve their efficiency or migrate to another line of manufacturing. Efficiencies grow, and a complex system of profitable resource uses arises spontaneously, as Hayek put it. 

“[T]he individuals should be allowed, within defined limits, to follow their own values and preferences rather than somebody else’s; that within these spheres the individual’s system of ends should be supreme and not subject to any dictation by others. It is this recognition of the individual as the ultimate judge of his ends, the belief that as far as possible his own views ought to govern his actions, that forms the essence of the individualist position”

-The Road to Serfdom pg.102

Hayek's idea that, while the order and development that are part of market economy regularities are entirely unexpected in their specifics and particulars, they are still a lasting conclusion that develops from basic norms of conduct that govern that society (Butler). Hayek's business cycle theory is a theory of the communications part of the pricing system gone astray owing to central bank meddling in the price of money itself. 

Hayek's business cycle theory is that over-expansion of credit by central banks sends a misleading signal to entrepreneurs about the availability of financing as well as the appropriateness of various phases of expenditure inside the entire design of manufacturing output (Butler). Credit growth causes an untenable boom in consumption and encourages slightly earlier capital investment, which must eventually be reversed when inflation and an inevitable credit contraction kick in (Butler).

Is Crypto the Future?

Cryptocurrency has seen a similar downward trend to other markets in 2022 thus far. Albeit, the downfall has been more dramatic because the growth and industry disruption potential is staggering. During capitulation periods, more progressive and forward-thinking ideas are quashed by tried and trusted enterprises.

Blockchain and cryptocurrency’s market structure allow for tremendous disruption in a plurality of sectors.

Where to Invest in Cryptocurrency

Centralized exchanges (CEXs) are an excellent place to start investing in crypto. If it’s your first time buying crypto Benzinga recommends using apps with a more streamlined and simple user interface such as Coinbase Global Inc. (NASDAQ: COIN). Other exchanges like KuCoin and Crypto.com are excellent as well and offer other incentives.

Which Exchanges Follow Hayekian Ideals?

Hayekian ideals are those of individualism and the denationalization of money. An interesting thought experiment might be to ask the question: Which exchange would Friedrich Hayek use?

Hayek would not use a CEX even if it is extraordinarily convenient. Opting for a decentralized and open-source alternative, he would likely choose a decentralized exchange (DEX) like Bisq, for example.

Does Traditional Economics Relate to Cryptocurrency?

Suffice it to say, the transition from Keynesian to Hayekian economics will be spearheaded by utility blockchains that will probably shift to a more market-driven economy. Despite their benefits, these technologies will continue to face resistance from governments before being more widely accepted. Primary among the criticisms of cryptocurrencies are their market volatility, issues of privacy and the interoperability of different types of currencies, all of which have hindered their adoption and are worthy of the criticisms that Hayek himself would have shared.

By the end of the 2020s, a concept more drastic than Hayek's marvelously prescient notion of denationalization will very certainly have become a permanent element of the world economy.