Posted on March 3, 2020
Is Bitcoin breaking the spell?
You, dear reader, probably agree with me: Technology is the best thing that could ever happen to mankind. Thanks to technological development, an ever-increasing proportion of humanity is now materially better off.
Oftentimes, technology is reduced too much to the first part of the word techno-. Taken from ancient Greek, this term stands for craftsmanship and embodies the material-physical element. The second component -logic is all too often forgotten. This is probably the more essential part of the word to understand the concept of technology in its entirety.
So logic refers to the mind and lastly to the intellect of man. Technology thus is a combination of craft and mental, the meta-physical. Through this interaction, man is able to achieve technological progress again and again. As man is capable of abstract thinking, more and more complex capital production structures can be built by his hands. In their manifestation, these are often something material or at least visible, even if it is predominantly something meta-physical.
The better and more sophisticated the capital production structures – technology in its entire meaning – the higher the productivity of the work performed. Not only more can be produced, but also better quality.
The Janus face of technological deflation
This technological progress has always had an impact on the prices of goods and services within the economy. In technical terminology, this is referred to as technological deflation. As rationalization progresses, prices fall; purchasing power, on the other hand, increases, even if wages remain nominally the same, as people get more for the same money. This is the blessing of technological deflation.
In our age of fiat money, technological deflation still works, but we hardly notice it anymore. The reason is that it is counteracted by an institutionalized increase in the money supply. If the currently dominant public-private partnership between central and commercial banks (supported by the state) did not constantly pump new liquidity into the economy, the prices of goods and services would probably be lower across the board due to technological deflation.
Especially since the 1990s, when the dynamism of the internet and digitization began to increase, prices should actually have fallen massively. This argumentation is counterfactual and therefore hardly measurable in quantitative terms. However, what Frédéric Bastiat has already noted applies qualitatively: There is always what you see, but there is also what you don’t see. In this case, these are the opportunity costs of technological deflation mitigated by money creation.
Not only have central bankers and their economists weakened technological deflation, but they have also even misused it to legitimize a sustained monetary expansion. Through the approach of hedonic price calculation, central banks began to take into account the qualitative improvement of goods and services when determining inflation. As a consequence, this, in turn, meant lower calculated inflation, which further conceals the negative consequences of money creation (rising inflation, for example). Meanwhile, the current robotization and automation and its productivity gains are once again putting the central bankers’ wheels in motion, allowing them to keep the money-locks wide open, while potential inflation is defused by ongoing technological deflation.
A technology of a different kind
As much as we do not want to miss technological progress, in all its forms it has paradoxically led to the fact that central currency planers could afford their money-interventionist cheating even more unresistingly.
Bitcoin could indeed break this spell. As a revolutionary Internet protocol, as a decentralized database, as a new kind of consensual mechanism, as a solution to the double-dispensing problem and much more, Bitcoin is a technological advance. Rather, its meteoric rise proves that it must even be a technological breakthrough.
But Bitcoin – and this is still overlooked by too many – is not “just” a technical matter, but also a monetary matter. Thus, the essence of Bitcoin should be rooted primarily in its essence as money and not in its design as a purely technical breakthrough. Here, too, the second part of the word logic is probably decisive in putting the first part of the word techno in the right context. In Bitcoin, technology is ultimately a means to an end, while the realization of a new, alternative money is the actual purpose.
Thanks to Bitcoin, technology could, therefore, unfold its effective effect for the first time. As a new hoarding and transactional technology, Bitcoin promotes technological deflation in a similar way as the smartphone has done. The latter has made it obsolete to carry around a separate photo camera, phone, video camera, agenda, TV, music player and much more. The productivity gains are enormous.
In the same way, Bitcoin makes the bank account, the safe, the bank, the payment service provider and the money transporter superfluous – if you practically follow through on Bitcoin’s promises. This, in turn, creates productivity gains for individuals and businesses alike, which is why prices are falling due to technological deflation and why central banks can once again step on the accelerator of monetary intervention…not so fast! Because Bitcoin is the first technology to take on central banks. Bitcoin does completely without central bankers and offers a monetary alternative.
To the extent that Bitcoin will continue to hold its own and deny central bank currencies liquidity, to the extent that the cryptoasset will hinder central banks from neutralizing technological deflation in the future with a glut of money. Bitcoin should thus kill two birds with one stone. Or even many central bank currencies with its decentralized ledger.