Political Economy and Bitcoin, 4/12
I disagree with Peter and Balaji
Kling’s Fundamental Axiom of Political Economy: Government can use force to protect your personal property, and government can use force to steal your personal property.
This leads to the following taxonomy:
Government is good at protecting and good at stealing: high state capacity
Government is bad at protecting and bad at stealing: failed state
Government is good at stealing, but bad at protecting except for a favored few: kleptocracy (This is also what North, Weingast, and Wallis call a “limited access order,” or “the natural state.”)
Government is good at protecting but bad at stealing: Null Set
If government doesn’t protect personal property there won’t be much to steal. That gives an advantage to countries with high state capacity.
The Case of Money
Think of money (or financial assets more generally) as a special case of personal property. Government can protect your money, and government can steal your money.
Divide money into three types of media: A, B, and C.
A = money in the form of Atoms, such as bills and coins. If you wish, you can include jewelry and gold in your possession.
B = money (other than cryptocurrency) in the form of Bits. Bank accounts, brokerage accounts, and other financial assets stored as entries on computers.
C = Cryptocurrency
For most Americans these days, B is the most important money medium. I pay all my bills in B, using the same computer on which I am writing this essay. When I shop, either in person or on line, I use a credit card, which is essentially using B.
A great thing about using B in the United States is that the government is really good at protecting it. We have deposit insurance, class actions, and financial regulations up the ying-yang. When those fail, we have bailouts. People get really ticked off when they think that the government is messing up the money protection function. They don’t like losing money to mismanagement or fraud. They don’t like high and variable inflation.
A down side of using B is that government is really good at stealing it. You can have it stolen very quickly if you are labeled a Russian oligarch or a terrorist financer or a Canadian truck protest financer.
But I would caution you that switching from B to C will not make you immune from government stealing.
G-man: “I’m here to stea—er, collect on fines/taxes that I have levied on you in the amount of $100,000.”
Crypto-boy: “Nanny-nanny boo-boo. You can’t take from me. My money’s all in Bitcoin, and you don’t know my private key. What are you going to do about that, G-man?”
G-man: “Lock you in prison.”
I’ll grant that with C you can make it harder for the government to figure out that you donated to the trucker protest. And you can make it easier to flee to another country to try to avoid getting locked up. But governments have a lot of surveillance tools at their disposal, and fleeing to someplace with no extradition arrangement creates its own difficulties.
In short, when you switch from B to C, any reduction in the government’s ability to steal from you strikes me is iffy and marginal. But you give up what I think of as valuable protection from government. If you decide you want to earn a return on your C and invest with a financial intermediary that is within the C ecosystem (not B), you have no recourse if the intermediary mismanages your funds and loses some of your money.
Peter and Balaji make it sound as though cryptocurrency is going to provide you with personal property that is good at being protected but bad at being stolen. But that is still the Null Set.
This is a solid argument against the libertarian utility of cryptocurrency in a high state capacity place. If you already live in a failed state or kleptocracy (say Venezuela or Russia), the tradeoff is quite different, and you might then think that you're better off trying to protect your own cryptocurrency, since the government is not going to be much help protecting your bank account. And of course states can change type over time, so even if your country is high state capacity now, you might want to hold some crypto as a hedge against its becoming a failed state or kleptocracy.
There's an interesting comparison here with gun rights. In a high state capacity, high social trust place, you don't need a gun to protect you from private criminals because the government is pretty good at doing that, and a gun will not do you much good if that government turns oppressive. So the libertarian utility of guns is mostly for people who live in places with high crime and ineffective police protection, or want to hedge against the place where they live becoming like that. There are obvious differences too: the externalities of gun ownership are quite different and the intra-national variation in protection from crime is much larger than the variation in protection of bank accounts. But this analogy may explain both why interest in cryptocurrency and guns tend to correlate, and why enthusiasts of both tend to place more hope in them than is warranted.
Arnold, I like your analysis but I think most governments are kleptocracies and the relevant issue is how bad they are at protecting a majority/minority of their population. In "normal" times they are not too bad at protecting a large majority but in shocking times government priorities change and the protected majority soon becomes much smaller. BTW, this is what has been going on in Chile since the 2019 outbreak; stay tuned: this afternoon Congress may approve either its own project or a project prepared last night by the executive in their struggle for power (both projects are about how much money to take out of the private system of pensions and under what conditions at a time in which the President, the Congress, and the Constitutional Convention are ready to discuss a new, public system of pensions).