Austrian economists are a burden for bitcoin

By attempting to claim Bitcoin to support their theories, Austrian economists are doing a disservice to the cause.

Outdated Theory

Isaac Newton was wrong about the origin of gravity. He believed it was some sort of universal attraction force that was simply part of how the universe works.

His law of universal gravitation assumed an “action at a distance” between all objects in the universe. A force whose intensity dissipates as one moves away.

[To be completely honest, Isaac did not believe he had completed a theory of gravity (ironically used today as the example of a complete and well-constructed theory), hence his famous quote: “hypothesis non fingo”.]

His mathematical explanation of gravity works very well. We can derive Kepler’s laws that describe the motion of planets around the sun from it. Predictions made using Newtonian laws are sufficiently good, and they still are for high school textbooks.

But some things could not be explained by Newton’s equations. Especially the movement of Mercury, the sun’s closest companion.

Later, Albert Einstein explained that gravity is caused by the distortion of spacetime around massive objects. In other words, we are pushed towards Earth by the curvature of spacetime, rather than being pulled down, as Newton had suggested.

This particular introduction aims to remind us that nothing is set in stone. Theories evolve. It would be foolish to think that science from the 1950s could be better than today’s.

The same goes for economic science. Dusting off old theories from obscure authors of Austrian thought is not a good idea.

Slay Your Heroes

It is in human nature to have heroes one aspires to resemble. In physics, it was long Newton. His theory of universal gravitation flawlessly described everything from the motion of comets, planets, and moons to the way objects fall on Earth. And then Einstein questioned everything.

We are all attached to our conception of reality, which is often inextricably linked to the idea we have of ourselves. Early Bitcoiners are viscerally sovereign individuals. So it was only natural that they should be receptive to economic thinking based on individualism and the rejection of state intervention.

Their heroes are Carl Menger, Ludwig von Mises or Friedrich Hayek. Many discovered economic “science” with Saifedean Ammous and his book “The Bitcoin Standard”. In chapter 14, we read a key sentence that sums up the impasse in which Austrian economists find themselves :

“I anticipate that the only banks that will survive are those 100 % backed by Bitcoin.”

In other words, Saifedean Ammous believes an economy can function with a fixed amount of money. A thought he still spreads :

“No, you don't need the money supply to increase. No, deflation is not bad.”
– @saifedean on #Bitcoin pic.twitter.com/yoTqYOOnRu

— Vivek⚡️ (@Vivek4real_) March 17, 2024

This statement originally came from the Austrian economist Ludwig von Mises who wrote in his 1949 book Human Action:

“The amount of money available in the whole economy is always sufficient.”

One can easily imagine why the Austrian school of thought might appeal to Bitcoiners. Holding Ludwig von Mises’s ideas to be true means cherishing the hope that Bitcoin will entirely replace fiat money (which would be inherently cancerous).

But is it really reasonable?

Don’t Trust, Verify

A scientist is a renegade ready to scrutinize everything through the scientific method. A single observation conflicting with the predictions of a theory forces a reconsideration of the reality one had envisaged.

It’s a chimera to believe that an economy functions better with an absolutely fixed money supply. Why ? Because of usury (interest-bearing loans), which was long banned because of the exponential growth of compound interest.

The first evidence of usury dates back to Babylon, around 1750 BC. The Code of Hammurabi prohibited lending money at more than 20%. We already knew 3,770 years ago that interest was something “dangerous” that needed to be limited by law.

Usury was also punished by the Romans and the Catholic Church. It wasn’t until 1917 that the Vatican lifted the anathema from canon law.

Why? Because the industrial revolution and fossil fuels triggered an exponential increase in productivity. In other words, our capacity to generate economic growth became compatible with the vicious cycle of interests.

It became possible for everyone to borrow and become homeowners. And borrowing means interest. Borrowing 100 000 dollars at a rate of 5% for 25 years implies repaying 175 000 dollars. We would quickly have serious accounting problems if the money supply was fixed. Defaults would be recurrent and the economy lethargic.

That’s why bankers inexorably increase the amount of credit. It’s about making sure that each generation can find enough money in the economy’s magma to repay both the principal AND the interest.

Abundance = Productivity

Yes, the fiat system is a ponzi scheme that requires perpetual growth and productivity gains (quantity of things produced per person).

Productivity = Machines = Energy

If you run out of energy, the party is over. Productivity decreases, preventing wages from keeping up with the inflation which is inherent in the fiat ponzi.

The following graph gives a clue as to why wages have not been able to keep up since the 1970s, the end of the famous thirty glorious years.

The average annual growth rate of oil production has dropped from 7.3% (red trajectory) to 1.3% (yellow trajectory). The price of a barrel of oil has risen from $3 in 1971 to $85 today…

What the fuck happened in 1971 ?

We went from an exponential growth of the oil production to a linear growth.

Soon the peak… pic.twitter.com/eBCBXURgBa

— Nicolas Teterel / PAX (@NTeterel) April 18, 2024

Unfortunately, our oil production growth rate is now close to 0%. And since 95% of transportation needs oil, a decline in its production would result in fewer exchanges and therefore less growth.

The oil peak is rapidly approaching and this physical limit to growth promises inflation as painful as it is persistent.

It’s important not to be enchanted by the sirens of Austrian economists. Prosperity is not a monetary sleight of hand. Abundance comes from energy, not the fantasized miracles of a fixed money supply.

The fiat system is the worst monetary system except for all those others, as Winston Churchill would say about democracy. If history teaches us anything, it’s that humanity always embraces the most efficient systems. The fiat system is no exception.

We should not expect miracles from Bitcoin. The blockchain does not contain oil, lithium, copper, etc…

As Michael Saylor says, Bitcoin “does not need to replace the fiat system to succeed”, and “no one can stop inflation”.

Bitcoin is a Store of Value

And not the new Mastercard or the new JP Morgan. Bitcoin does not need to replace the fiat system at all. Its main attraction is being the best store of value in the world. For two reasons:

-Absolute scarcity (21 M)
-Divisibility (100 M satoshis per Bitcoin)

This second attribute is crucial. While one formerly had to be wealthy to protect oneself from inflation (big city real estate, master paintings, collectibles, etc.), this privilege is now accessible to everyone.

Such is the true destiny of Bitcoin: to protect from inflation, and not to replace the fiat system. The fact that it can also serve as a means of payment is secondary.

To believe that Bitcoin will replace the banking system is a distraction that causes mental dead ends for many people. Many say to themselves, for example:

“Hmm, Bitcoin’s promise is to replace fiat money. But at the same time, it’s too volatile, it’s taxable for every transaction, there’s a loophole due to interest, governments will always refuse to give up their currency, and therefore it will not replace fiat money, and therefore I will not buy it”.

In short, Austrian economists and their fantasies rekindled by the advent of Bitcoin are a major barrier to its adoption. We must stop claiming that Bitcoin can or should replace national currencies.

Bitcoin is actually competing with gold and all risky assets for long-term investment. It competes with real estate investment for Airbnb, Western Union, or American Treasury bonds as an international reserve currency.

Happy Halving 🙂

This article was first written in french.