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  • Hayek and Satoshi Meet in Vegas

    Hayek and Satoshi Meet in Vegas

    F.A. Hayek is smiling, or perhaps blushing, if news has trickled up to where all great Austrian economists go. The Legends Room Gentlemen’s Club in Las Vegas has created its own virtual currency, known as LGD.

    Todd Prince broke the story in the Las Vegas Review Journal that the soon-to-be-open club is “hoping a new marketing weapon – a virtual currency – will help them wrestle tech- and investment-savvy clients away from the strip club giants.”

    Club owners are selling memberships to Legends for $5,000, which can be paid for with bitcoin as well as the US government’s legal tender or credit cards. “Members in return will receive 5,000 LGD, a virtual currency created by Legends Room, that can be used to pay for lap dances and drinks.”

    Alert readers will notice that the club’s owners have set the LGD/$ exchange rate at par. One wonders whether it will remain there. After all, the aforementioned bitcoin has taken off yet again and it takes 1,994.42 of Uncle Sam’s bucks to buy a single Satoshi bitcoin.

    A New Crypto

    Non-members will be required to buy at least one LGD to enter the club’s VIP room, so the owners hope this will create a market for their cryptocurrency. If nothing else, they are dreaming big, with plans to display the daily price of their currency along with bitcoin on video monitors throughout the club.

    Prince explains, “Members and other token-holders will be able to sell their LGD for bitcoin on the Bittrex cryptocurrency exchange or for cash through the club’s concierge to those seeking access to the VIP room.” LGD will be just one of the more than 190 cryptocurrencies Bittrex supports.

    In a vast departure from typical strip club protocol, Legends will offer a Bloomberg terminal for patrons to monitor stock and bond prices during trading hours. No doubt some dancers will take advantage of the terminal to keep an eye on their investments. (The most remembered story I’ve told to all economics classes I’ve taught is about the worst stock tip I ever received – from a dancer in a strip club.)

    A Fad No More

    By coincidence, the May 19th issue of Grant’s Interest Rate Observer devotes its front page to bitcoin with the catchy title “I own tulips at 40 cents a bulb.” The folks at Grant’s queried a few investors in the bitcoin space. None poo-pooed the cryptocurrency as a bubbly fad: “It’s a stored value, a monetary asset that’s winning its place in the hearts and minds of the world’s financially repressed,” says Murray Stahl, speaking of Satoshi’s handiwork.


    Stahl went from not knowing what a bitcoin was two years ago to buying 20 computer servers and beginning a bitcoin mining operation. Besides Satoshi’s technology, Stahl was impressed with the bitcoin founder’s theory. “He wanted to create a non-inflationary currency,” Stahl told Grant’s. “That is really what he wanted to do. The first one that ever existed that no government could ever tamper with, and he did it.”

    By the way, Stahl says the cost to mine a bitcoin is about $1,200, but he’s not about to sell his. “I think that something has to replace the current monetary insanity.”

    Another friend of Grant’s is buying other cryptocurrencies. The business plan of these currency creators is speculation, “and they all say the same thing,” Grant’s friend concludes. “It’s no problem, we’re just going to convert it into bitcoin.”

    For Professor Hayek, competition in currencies was not about creating speculative vehicles, but instead, “under the proposed scheme, the managers of the bank would learn that its business depended on the unshaken confidence that it would continue to regulate its issue of ducats (etc.) so that their purchasing power remained approximately constant.”

    In his book Denationalization of Money, Hayek anticipated the current monetary insanity Murray Stahl speaks of, explaining,

    And it should be in the power of each issuer of a distinct currency to regulate its quantity so as to make it most acceptable to the public – and competition would force him to do so. Indeed, he would know that the penalty for failing to fulfill the expectations raised would be the prompt loss of the business. Successful entry into it would evidently be a very profitable venture, and success would depend on establishing the credibility and trust that the bank was able and determined to carry out its declared intentions. It would seem that in this situation sheer desire for gain would produce a better money than government has ever produced.

    QR Codes

    Besides its store of value potential, bitcoin and other cryptocurrencies have great advantages in ease of payment. Great wealth can be transmitted with the push of a button. Or, for the girls who will work at Legends, Mr. Prince writes, “Members would be able to scan QR bars either on the dancer’s phone or placed on her body rather than stuffing dollars into her stockings.”

    While the number of bitcoin to be produced will stop just short of 21 million, the ambitious owners of Legends are giving themselves more running room, limiting the number of LGD to 30 million. Janet Yellen and Mario Draghi have no such constrictions.

    Legends will open in June, and will be a great place for a field trip to see cryptocurrency in action during Freedomfest July 19th through July 22nd.

    Douglas French

    Douglas French is an Associated Scholar at the Johnson Center at Troy University and adjunct professor at Georgia Military College. He is the author of three books: Early Speculative Bubbles and Increases in the Supply of Money, Walk Away, and The Failure of Common Knowledge.

    This article was originally published on FEE.org. Read the original article.

  • Government Has Done Nothing Good for Bitcoin

    Government Has Done Nothing Good for Bitcoin

    The dollar exchange ratio of Bitcoin has finally topped $2,000. This is thanks in part to new international demand for the currency, due to the great ransomware panic of 2017. It appears that this was a catalyzing event to get BTC to the new level.

    The hackers demanded Bitcoin as payment for unlocking user files, and reportedly offered excellent customer service. Many people who had thus far eschewed Bitcoin were enticed into the ownership and exchange of this payment tool for the first time.

    The story reminds me of Bernard Mandeville’s theory that vice can nurse ingenuity.

    Do we not owe the Growth of Wine
    To the dry shabby crooked Vine?

    This newest turn is no different from many factors that have led to Bitcoin’s rise and rise over the last eight years. It was released as a safe haven from the financial crisis of 2008. If a decline in real estate values can really threaten the foundations of world finance, how good can our current money and payment systems really be? Our times were crying out for something new.

    The Internet had shown us how to do almost everything better than before. Surely it could the same for money and payment systems. Money itself hadn’t been modernized in one hundred years. As for credit cards, they work today as they did just after World War II: third parties assess your trustworthiness and grant you trust based on your identity. We haven’t really advanced much beyond this basic model.

    Disruptive Money

    Then came Bitcoin. With its payment system, you exchange ownership rights to scarce digital goods (yes, goods, in this case, is a metaphor for a mathematical fiction) directly peer-to-peer with no third-party source of intermediation. In other words, it works exactly the way cash works when you buy milk at the convenience store. Your identity doesn’t matter. The paper is a proxy for the ownership of real goods.

    But it’s even better because you don’t actually have to be there to make it happen. Any two people on the planet with access to the internet can transfer ownership rights to a digital thing. That makes Bitcoin – the numeraire that makes the ledger system work – a global currency.

    Bitcoin never demanded that it be valued by virtue of its existence. It merely presented itself to market actors and asked them to judge. Ten months following its release, the first posted price of Bitcoin appeared: someone, somewhere found this thing valuable. The market itself – not a decree, not an imposition by intellectuals, and not some social consensus – is the source of Bitcoin’s value.

    Of course, it was the edgiest users in the early days that gave Bitcoin its most robust test runs. Initially, it was valuable for online trades of pot, and this was long before many uses of marijuana became legal for many Americans. Then it has been used for other nefarious purposes involving escort services and more.

    I don’t see that this is a point of embarrassment for Bitcoin. It’s the path of many innovations. Mandeville again comes to mind.

    Hackers Love It Too

    You can see, then, why the hackers would choose it as a preferred currency. No exchange rates between countries. No third parties to block access. No limits on the people who can use and transfer the stuff. The hackers were pretty smart here: they preferred this currency to every other existing currency that is tracked, controlled, and limited in its development by governments.

    Bitcoin was blessed in its early days by government officials who figured it was going nowhere. Years went by while it thrived in an atmosphere of benign neglect. That was the source of its rising sophistication and marketability. Bitcoin didn’t need government to become its champion; Bitcoin needed government to stay out of the way.

    For the most part government didn’t interfere until the dread day of March 18, 2013, on which the Financial Crimes Enforcement Network imposed strict rules for converting between Bitcoin and dollars. If you made a business out of this practice, FinCEN demanded (no Congressional mandate required) that you register as a money-exchange business, a very expensive and arduous process.

    That regulatory imposition, only four-pages long, had a devastating effect on market development. Hundreds of entrepreneurs had seen an opportunity here. Suddenly they were all being told that if they go ahead with their plans, they would be treated as criminals. Many players just walked away. The only institutions that were left after this shake out were the largest ones that had the capital to weather the new costs of doing business. The free market of Bitcoin/dollar exchange was at an end.

    A Pain in the Neck

    It’s been this way for Bitcoin all along. So long as you stay within the cryptocurrency’s ecosphere, you are good and safe and there is innovation all around. Moving from dollars to Bitcoin and back again, however, presents some serious problems.

    I don’t mean technological problems, of course. Bitcoin can handle that. The problem stems from government’s desire to make Bitcoin behave like an old-fashioned money and payment system, with know-your-customer rules and, inevitably, the desire of our rulers to wet their beaks in a new revenue pond. They want a cut of every new source of wealth, which means that they want to follow every monetary tool, especially that which is new and innovative.

    Bitcoin is becoming a money? You have to give government its cut.

    Fortune reports:

    A closely-watched fight between the Internal Revenue Service and a popular bitcoin exchange took a new twist last week, as senior Republicans in Congress sent a sharply-worded letter that suggests the tax agency is overstepping its powers.

    The letter concerns an IRS investigation into possible tax evasion by customers who use Coinbase, a San Francisco-based company that many people use to buy digital currencies. As part of the investigation, which began last year, officials demanded that Coinbase turn over information for every one of its accounts.

    The letter opposing this move is actually pretty good:

    We strongly question whether the IRS has actually established a reasonable basis to support the mass production of records for half of a million people, the vast majority of whom appear to not be conducting the volume of transactions needed to report them to the IRS. Based on the information before us, this summons seems overly broad, extremely burdensome, and highly intrusive to a large population of individuals. The IRS’s actions in this case also set a dangerous precedent for companies facilitating virtual currency transactions that could be subject to a similar summons.

    Few innovations have been met with such incredulity from the outset through the rise and development periods. Now Bitcoin is firmly rooted in modern finance, and is poised to be a leader in the future of currency and payment systems. No matter what government does now, Bitcoin has a brilliant future.

    The Need Is There

    We need a nongovernment, global currency that is reliable, secure, universally available, unmediated by financial authority, and tied to real ownership. We didn’t entirely know that we needed this – and we didn’t know it was technically possible to do this entirely in a digital realm – until Bitcoin came along. Now we do and there is no going back.

    It operates on its own just fine. All government can do – now just as in the past – is slow the growth and keep the future from happening as quickly as it should.

    To be sure, many stakeholders in the Bitcoin space favor some government involvement, if only to end the legal uncertainty that continues to hold back the innovation and the infrastructure behind it. This is tragic but understandable in times when all human activity is either mandated or prohibited. Here’s to hoping that cryptocurrency itself makes strides in changing that presumption.

    N.B.: FEE has been on the cutting edge of commentary on this important topic since the early days, and FEE’s work surely could use donations in this currency.

    Jeffrey A. Tucker

    Jeffrey Tucker is Director of Content for the Foundation for Economic Education. He is also Chief Liberty Officer and founder of Liberty.me, Distinguished Honorary Member of Mises Brazil, research fellow at the Acton Institute, policy adviser of the Heartland Institute, founder of the CryptoCurrency Conference, member of the editorial board of the Molinari Review, an advisor to the blockchain application builder Factom, and author of five books. He has written 150 introductions to books and many thousands of articles appearing in the scholarly and popular press.

    This article was originally published on FEE.org. Read the original article.

  • A Century Later, Mises Is Still Being Validated

    A Century Later, Mises Is Still Being Validated

    It has been said that “the definition of insanity is doing the same thing over and over again and expecting different results.” No one quite knows who first uttered this remark; it has been attributed to Albert Einstein, Mark Twain, Benjamin Franklin, and has even been said to be an Ancient Chinese Proverb. What is known is that this cliché has been repeated over and over again so often that its mere mention substantiates its own definition.

    Several of the ladies and gentlemen above wanted to let us know that they’re merely eccentric, and if they want to do things all over again and again and again, we should let them…

    Nonetheless, we repeat it again because it’s particularly fitting to today’s deliberations. Here we begin with a look back to the past in search of edification. For the miscalculations of the past continue to dictate the insanity of the present.

    Many years ago, a bright minded and well intentioned Italian pursued a devious undertaking. His efforts aimed to conceive a pure theory of a socialist economy. His objective was to take the sordid teachings of Marx and pencil out the mechanics of how a centrally planned economy could bring a life of security and abundance for all. What follows is an approximation of how the dirty deed went down.

    Seeing the Light

    In 1908, Italian economist Enrico Barone suffered an abstraction. One late night he skipped a bite of his meatballs and marinara, and gazed into the outer frontiers of deep space. Looking around, he couldn’t believe his eyes. For in this far corner of absolute darkness, he saw something truly amazing. Out in the distant reaches of nothingness, peering into a black hole, he saw not the dark. Rather, he thought he saw the light.

    Barone’s light was a socialist utopia achieved through “scientific management” of the economy, lorded over by the Ministry of Production. Through this endeavor, he imagined, an economy could attain something called “maximum collective welfare.”

    Enrico Barone in the only photo of him we could find. Both Vilfredo Pareto (in 1897) and Barone (in 1908, in the monograph “The Ministry of Production” discussed above) used a system of simultaneous equations based on Walrasian general equilibrium theory in order to investigate whether there was some sort of theoretical/ mathematical solution available to central planners facing the problem of what to produce, how much of it to produce, how, when, and where to produce it, etc., what resources in what quantities to allocate to capital goods production, how much consumption to permit, etc., etc. – all the stuff socialist planners ultimately turned out to be really bad at. Anyway, we have to defend Barone and Pareto a bit, as neither of them seemed to really believe that the approach was actually viable in the real world.

    After presenting all his nifty equations, Barone pointed out that the planners would ultimately still need all the things they thought they could abolish (prices, rent, profits, interest, savings, etc., which he averred would “probably return under different names”). He also noted that because no a priori determination of the “economically most viable technical coefficients” for the production system was conceivable (always assuming the goal of the planners was to maximize welfare), they would have to “experiment on a grand scale” – which would be far more wasteful than the so-called “anarchy of production” they wanted to replace.

    In the final pages of his monograph Barone proceeded to lambast “collectivist writers…[who] simply show that they have no clear idea of what production really is”, and inter alia remarked that “to promise increased welfare and to propose to “organize” production and to preach about free love in the new regime is simply ridiculous nonsense.”

    Pareto meanwhile noted along similar lines that it would simply be impossible to perform all the calculations needed for running a complex economy in time and recommended to “rather observe the practical solution given by the market”. The problem was that the Marxists were simply too dense to understand what they were trying to tell them – instead it ended up giving them ideas (further elaboration regarding the issue is in the caption under the Mises picture, below). [PT]

    Swiss Cheese Rationale

    The proposal was simple enough. If a bounty of academics were put to the task of determining the best prices for all goods and services, supply and demand could be optimized to produce an economy without poverty, without unemployment… and without possibility.


    Of course, with all these number crunchers hammering out technical memorandums and white papers, projecting data into the future with the intention of fixing the optimal price of toothpaste and pizza, how could they account for a change beyond their control or imagination? What if a springtime heat wave resulted in a meager wheat harvest?

    How would this affect their pre-determined price for a 16 inch pizza? Would government mandated thin crust be the solution? More than likely, before the data fabricators could re-optimize the price to the change in conditions, the pizzerias would be out of pizza dough because the price wasn’t allowed to naturally adjust upward by free market interactions. Government-induced shortages and artificial scarcity would result.

    With just a little common sense, Barone’s ideas are quickly exposed as absurd.

    From an academic standpoint, in his 1920 monograph, Economic Calculation in the Socialist Commonwealth, Austrian economist Ludwig von Mises, poked so many holes through the rationale it was transformed to Swiss cheese.

    Swiss cheese does indeed have holes – this reminds us of the other day, when we bought a piece of Swiss cheese at a local supermarket, only to find out at home that the wrapping paper was empty. Upon confronting the author of this transgression (the dweller behind the cheese counter) with his misdeed, he explained that it had been a Swiss cheese with particularly large holes, and the piece he had sold us simply was one of said holes.

    We realized that if we were to time our future Swiss cheese purchases judiciously, we would be spared a lot of unnecessary calorie intake. In socialist Utopias one can afford sloppier timing… there they sell only the holes most of the time (a popular snack in Caracas these days is reportedly “Hole of Swiss Cheese with Rat”). [PT]

    With exacting repudiation, Mises argued that in a socialist economy rational economic calculation is impossible; in the absence of private ownership of the means of production, attempts to allocate resources efficiently must fail.

    Without market-determined prices for goods and services via free exchange it is impossible to establish prices that reflect actual conditions. Without prices that are grounded in reality, the production and consumption relationship becomes distorted. In the absence of the natural corrective mechanism of market-determined prices, oversupply and scarcity conditions extend out to absurdity.

    Ludwig von Mises naturally refrained from wasting time by wrestling with general equilibrium equations. He realized right away what the core problem was, but was misunderstood and/ or misinterpreted by contemporary and later socialist economists, of whom frighteningly large numbers were uselessly occupying otherwise perfectly fine standing room in his heyday – there must have been a nest somewhere, considering how they suddenly proliferated (their large number did nothing to improve the quality of their ideas and arguments.

    There were also a few interesting chameleons like the historicist Werner Sombart, a trust fund baby who started out as a radical Marxist, then joined the “socialists of the chair” who supported the Prussian dynasty of the Hohenzollern, and later on discovered his inner nationalist and became chummy with the Nazis without so much as batting an eyelid – just as long as he was in bed with vile statists he seemed to be happy!).

    Anyway, after the publication of Mises’ monograph on the literal impossibility of a rational economy under socialism, Mises, Hayek and occasionally Lionel Robbins (a fellow fighter of the good fight on Hayek’s side before he defected for unfathomable reasons), proceeded to debate the leading socialist economists on the socialist calculation problem for decades (Menger and Boehm-Bawerk had debated the previous generation, except for those who invoked polylogism so as not to have to defend their ideas against “economists employing bourgeois logic”.Today’s identity-politics SJWs who have whole lists of topics white males are supposedly not allowed to speak or think about are a bit reminiscent of that).

    Socialist economist Fred Taylor was apparently inspired by Barone’s remark that there would be no equations for the planners to sensibly solve if they didn’t do “experiments on a grand scale”. While Barone seemed to indicate that this rendered the entire exercise useless and they might as well stick with the market economy, Taylor shrugged and said “Why not? Let’s do that!” Consequently, he proposed the “trial and error” method of central planning, once again missing the essence of the problem.

    Taylor then joined Oscar Lange with whom he wrote “On the Economic Theory of Socialism”. Two or three years later Henry Dickinson’s “Economics of Socialism” was published. This trio was in the process of conceding step by step that without prices for capital goods, rational resource allocation was indeed not possible, just as Mises had always pointed out.

    Over the decades the debate had moved from “calculation in natura” propagated by Otto Bauer in the late 19th/early 20th century (a bizarre idea, we would have liked seeing him draw up a balance sheet), to the planners simply using the Pareto/ Barone equilibrium equations to “calculate” production, to the addition of the “trial and error” method as a refinement, until finally, they renamed their method “market socialism”, adding some additional ideas to Taylor’s trial and error shtick by which they hoped to successfully replicate the price system.

    There would still be socialism, but the central planners and their subordinated factory managers would actually “play at market” – they would run a kind of make-believe market, a bit like little kids playing Monopoly. Given that they went as far as wanting to try that, one wonders why they didn’t just decide to simply stick with a market economy!

    To this final pathetic attempt to save their tattered socialist economic theory Mises inter alia remarked later:

    […] the cardinal fallacy implied in [market socialist] proposals is that they look at the economic problem from the perspective of the subaltern clerk whose intellectual horizon does not extend beyond subordinate tasks. They consider the structure of industrial production and the allocation of capital to the various branches and production aggregates as rigid, and do not take into account the necessity of altering this structure in order to adjust it to changes in conditions. What they have in mind is a world in which no further changes occur and economic history has reached its final stage. They fail to realize that the operations of corporate officers consist merely in the loyal execution of the tasks entrusted to them by their bosses, the shareholders. The operations of managers, their buying and selling, are only a small segment of the totality of market operations. The market of the capitalist society also performs those operations which allocate capital goods to the various branches of industry. The entrepreneurs and capitalists establish corporations and other firms, enlarge or reduce their size, dissolve them or merge them with other enterprises; they buy and sell the shares and bonds of already existing and of new corporations; they grant, withdraw, and recover credits; in short they perform all those acts the totality of which is called the capital and money market. It is these financial transactions of promoters and speculators that direct production into those channels in which it satisfies the most urgent wants of the consumers in the best possible way. These transactions constitute the market as such. If one eliminates them, one does not preserve any part of the market. What remains is a fragment that cannot exist.”

    Oh well… making favorable mention of speculators, promoters and entrepreneurs when explaining to the Reds what they are wrong about is probably a good way of getting them riled up…:) Mises’ remark above indirectly encompasses questions about the nature of knowledge and its distribution Hayek had begun to discuss in the early 40’s. The point being that what all these individual entrepreneurs, speculators, promoters etc. discover and know, their individual talents and the part of their knowledge that is tacit, which they cannot even verbalize themselves – all of these things a central planning agency can never learn and will therefore never know. Even if its bureaucrats were mind readers and did know about them, why would they ever care? In the socialist commonwealth going the extra mile has no rewards.

    As a final remark to this highly condensed caption version of the socialist calculation debate: although Oscar Lange became a high-ranking communist official in Poland after WW2, the system of “market socialism” was never even tried there. They opted for old-fashioned Stalinist oppression instead (and the guy had sounded so reasonable while he was still in the US!). We know Lange had still not conceded a basic error in his in old age, as he made a gleeful remark in 1967 about computers soon being able to calculate all those equilibrium equations proposed by Barone rapidly enough that a perfect 5 year plan could finally be produced for the comrades. Good grief! [PT]

    Polish-American socialist economist Oscar Lange

    Ludwig von Mises’ Century of Validation

    The planners are never able to get things quite right. In time, these absurdities become ubiquitous. For example, in a socialist economy you’ll find supermarkets with long lines of people and empty shelves. Another definitive gift of socialist economies is toilets without toilet seats. How is this even possible?

    Still, the socialist visionaries loved Barone’s gibberish because it endorsed their conceit. Here was a marvelous way for the enlightened illuminati to play god, muck with people’s lives at large, and remake the world in their image. Conversely, the mainstream economists of the day greeted Mises’s truths like a five-year-old first greets word that Santa Clause isn’t real. They derided his efforts and attempted to marginalize his work. This still continues today.

    The ideas of Barone, which were an attempt at defining a practical application of Marx, swept across Eastern Europe during the early 20th century like a medieval plague. Later, a somewhat altered derivative of these ideas resurfaced in France, the United Kingdom, the United States, and Japan, among other places, within the intersection of Keynesian fiscal policies and Chicago school monetary policies.

    Rather than having to directly fix the price of individual goods and services via a Central Planning Board, it was established that a Central Bank can crunch fabricated aggregate demand data and control the prices of an entire economy just by monkeying around with the price of credit. What’s more, governments could run perpetual deficits to remold things nearer to their heart’s desire.

    Mises’ efforts to refute socialist economic proposals nearly a century ago were explicitly validated with the decline and fall of Soviet socialism. Presently, they are being openly validated again, with the utter chaos being heaped upon the people of Venezuela.

    The somewhat diminished modern-day shopping experience in Venezuela – meet the latest attempt to make socialist economics “work” by finally “doing it right”.

    Et Infinitum

    Indeed, the results of government intervention are always the same. Stagnation, inflation, declining living standards, and widespread social disorder. No doubt, they’ll be repeated to insanity.

    In closing, and although many refuse to recognize it, Mises’ truths are currently borne out in the United States, and other social and corporate welfare economies, where money, which is a form of private property, is covertly confiscated by the insidious effects of a centrally planned system that’s based on ever increasing issuance of debt.

    Lengthy article-in-article captions by PT.

    Reprinted from Acting-Man.

    MN Gordon

    MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.

    This article was originally published on FEE.org. Read the original article.