Paul Krugman Doubles Down on Crypto Skepticism
Esteemed economist Paul Krugman has doubled down on his crypto skepticism in an op-ed published in The New York Times. Ahead of his scheduled appearance at the ChainXchange conference, Krugman argues that cryptocurrencies fly in the face of 300 years of the evolution of money.
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Paul Krugman on the History of Money
Citing crypto’s lack of tethering to the real economy and high transaction costs, the economist argued that the history of money has evolved to present forms of payment and exchange that have increasingly lower transaction costs and that are less resource intensive to produce. Per Krugman, the trajectory of changes in the forms of money we use is:
“… one of reducing the frictions of doing business and the amount of real resources required to deal with those frictions.”
From gold and silver coins to banknotes and fiat money, and from cash payments to checks and then digital forms of payment like credit and debit cards, monetary history demonstrates the continual move toward cheaper ways to pay and exchange. Cryptocurrencies, he argues, would reverse that trend.
Paul Krugman on Transaction Costs
If the way we pay for goods and services has changed over time to favor payment methods with lower transaction costs, why would we revert to a form of exchange with the higher transaction costs associated with cryptocurrencies?
Tellingly, Krugman argues:
“Instead of near-frictionless transactions, we have high costs of doing business, because transferring a Bitcoin or other cryptocurrency unit requires providing a complete history of past transactions.”
He is, of course, correct. But only partially. It is true that as the bitcoin mempool swelled late last year to over 100,000 transactions-in-waiting, the average bitcoin transaction cost hit $5 USD, with fast transfers requiring fees of $50 or more. Transactions — rather than taking seconds — could sit awaiting confirmations for a number of days.
The Ethereum network often experiences significant delays, with the middle of 2017 seeing hundreds of thousands of pending transactions and rising fees.
Cryptocurrencies have experienced scaling problems as their usage levels have risen. But where skeptics like Paul Krugman see transaction costs and delays as part-and-parcel of cryptocurrencies, their advocates see these bottlenecks as scaling issues relating solely to their infancy and sudden surges in use.
Secondly, it must be pointed out that not all cryptocurrencies were born equally. Ripple’s XRP has transaction speeds, according to the company, of 1,500 transactions per second. Ripple Labs also claims to have the scaling capacity to handle double the number of transactions per second of Visa.
Nano XRB — the cryptocurrency formerly known as RaiBlocks — boasts transaction speeds of 7,000 transactions per second, illustrated in this graphic tweeted by Zack Shapiro:
— Zack Shapiro (@ZackShapiro) December 26, 2017
Nano has a unique infrastructure referred to as “block lattice”, with each account on the blockchain having its own private chain.
The criticism also ignores one specific use case — peer-to-peer cross border transactions — in which even the more sluggish cryptos are manifestly faster and cheaper than using traditional bank transfers.
And one can’t help but wonder if the Nobel laureate isn’t comparing apples to oranges. Visa’s speed and cost advantages at the everyday retail POS system is due, in no small part, to its legacy infrastructure advantages over cryptocurrencies. Digital currencies could solve the problem of the major global payments technology companies’ grip on POS transactions, and the associated fees they charge merchants (and in the end, consumers).
Krugman is not wrong that cryptocurrencies have generally failed to live up to their transaction speed promises. His position, however, is somewhat premature.
Paul Krugman on Resource Intensiveness
Krugman rightly argues that the transition from metal-based coins to banknotes made currency much less resource intensive than it had been. He is similarly correct in arguing that, especially in the case of cryptos on the more robust blockchains — like bitcoin — mining is resource heavy.
Krugman states that:
“… the high costs — making it expensive to create a new Bitcoin, or transfer an existing one — are essential to the project of creating confidence in a decentralized system.”
Beyond the scope of this article is a comparison of the resources required to run a cryptocurrency network with those required to operate a global banking system. According to Wikipedia, there are some 3.5 million ATMs worldwide. In addition to the associated hardware costs, they consume electricity and computational power. Add to this the costs of bricks-and-mortar bank branches, bank payrolls, the costs of operating printing presses, and the costs of running databases to support fiat transactions globally and you have a resource heavy industry.
Skeptics that cite bitcoin’s mining difficulty need to make an attempt to quantity the cost of sustaining traditional banking systems. Otherwise their concerns over the costs of mining cryptocurrencies rely on isolated figures without context.
Paul Krugman on Tether — No, Not That Tether
Krugman makes the argument that cryptocurrencies are not tethered to the real economy in the same way as fiat currency is. Specifically, he defines a currency as a value system with an army. A government will accept its own issued currency as payment against tax liabilities, thereby tethering that currency to a real value.
Cryptocurrencies, on the other hand:
“… have no backstop, no tether to reality. Their value depends entirely on self-fulfilling expectations — which means that total collapse is a real possibility. If speculators were to have a collective moment of doubt, suddenly fearing that Bitcoins were worthless, well, Bitcoins would become worthless.”
It is difficult to argue with this logic. However, there are some points that can be made. Governments do fail and have reneged on their responsibility to maintain certainty in a currency’s value. Ill-managed economies suffering from hyperinflation erode public faith in the value of state-backed currencies. In some cases, such as in contemporary Venezuela, people have turned to cryptocurrencies as more reliable stores of value.
There is some credence to the idea that code-derived value is a worthwhile endeavor to explore in the future journey of money. Krugman downplays the significance of examples of disastrous money supply policies conceived by bad and incompetent governments as marginal when he says:
“Governments have occasionally abused the privilege of creating fiat money, but for the most part governments and central banks exercise restraint, again because they care about their reputations.”
Yet, history is littered with countless examples of hyperinflation and monetary policy failures that directly result from government neglect. Is code-based monetary certainty an idea not at least worth considering?
Debate Without the Hyperbole
Krugman is right in calling for a discussion that isn’t based on the cult-like hysteria that usually qualifies for debate on a coin’s echo chamber-like Facebook fan page. Too much crypto commentary tends to be punctured by the hateful and mindless outbursts of sectarianism.
Nobel prize laureates require slightly more than that for stimulation. Bitsonline would love to be part of an informed and intelligent discussion of the merits of cryptocurrency with the likes of Paul Krugman.
Have your say. What do you make of Krugman’s points?
Images via Pixabay