Taxes Explain the Value of Bitcoin! WHAT?!
What gives bitcoin its value? Its backed by nothing. Well, can't you say the same thing about the US dollar?
Bitcoin Creates its Own Demand Analogous to Taxation
(Image from Bitcoin Taxes on Twitter: https://twitter.com/bitcointax)
In this video, Dylan Moore of the Volitional Science Network and Nima Mahjour of www.economicsjunkie.com continue our series on Modern Monetary Theory around the subject of bitcoin. We've all been hearing from every FUD-corner of the earth that bitcoin is in a bubble that's about to pop. In some sense this may be true--bitcoin has gone through several popped bubbles, but always comes back to rally even stronger. But is there a greater bubble that will pop and send bitcoin down to zero to stay there forever? After all, there is nothing backing up the value of it.
Modern Monetary Theory and the Value of Money
Modern Monetary Theory (MMT) is an economic theory developed in previous decades by economist, entrepreneur, and banker Warren Mosler, previously called soft currency economics. MMT asserts that the value of money is derived from the demand of the state. That is to say, money is valuable because the state taxes it.
This sounded absolutely bizarre the first time I heard it. Why would the state want something if it wasn't valuable to begin with? The economic story I remember hearing, is that the state taxed the valuable labor and goods of people that they already had in order to fund its spending. How else could it happen? Just like I need to earn money first before I can spend it, the state must need to tax money first in order to spend.
Turns out this equation is backwards. In his book Debt: The First 5000 Years, David Graeber describes that there is no archaeological evidence that the state taxes before it spends. It actually spends before it taxes.
...what?
The Story of Taxation and Money
This is how the story plays out: a tribal leader, whether its a chief, king, emperor, khan, or president, demands a tax in a specific token. This token can be anything: gold, silver, paper notes, tools, tally sticks*, iron dipped in vinegar, digital bank ledgers, cryptocurrency--anything. Typically, it must be either something scarce or something that only the tribal chief can create. Once this occurs, immediately everyone within the tribal chief's jurisdiction become unemployed. Unemployment is an effect of taxation. People want employment because it pays in the currency that they are able to pay their taxes with. If no one is demanding that currency for tax, there is no reason to work for it. For the sake of this article, let's say that the tax demanded is a dylannor, a currency only I can create. Counterfeiting carries the penalty of death.
Tally Sticks
*Tally sticks are an example of a tax system used in medieval Europe (image source: https://en.wikipedia.org/wiki/Tally_stick )
The people, now unemployed and not willing to counterfeit, ask, "What the heck is a dylannor and how do I get them?"
To which my chieftain response is: "If you work for me, I will pay you in dylannors."
Voila. I have just created public spending. The only thing that limits my ability to spend is my ability to create dylannors. If I make them out of gold, spending requires gold mining and gold taxation. If I make them out of paper or digital ledgers in central banks, my imagination is the only limit.
Especially in the latter case, I don't need the money in order to spend, I simply need to demand the money in order to make it valuable to begin with. The violence of the state is what gives money its value. Pay your taxes, or else. In effect, a nation's currency can simply be viewed as tax tokens that can be exchanged for safety from harassment of the state. The state gives value to an otherwise worthless item (paper notes, digital ledgers, etc.) through the demand of this value in taxes.
What does this have to do with bitcoin?
Nima Mahjour has been the first to argue this (article below): bitcoin's value is derived from the demand of bitcoin miners. In the same way that the state demands taxes in order to give value to its money, bitcoin miners demand bitcoin in order to access the bitcoin blockchain. They create their own demand. The blockchain is a valuable tool as a ledger that cannot be destroyed, as any bitcoin-fan knows, and the only way to get access to that ledger is by exchanging an otherwise worthless digital token called bitcoin.
*Nima Mahjour of economicsjunkie.com
The implications of this are staggering. Many MMTers argue that the state is necessary to create a currency, because the violence of taxation is what has given money value throughout its history. However, is violence the only thing that can give value to a currency? I argue no. Bitcoin is showing us this right before our eyes. I think we're still a ways before cryptocurrency replaces fiat, but the omens are becoming more and more clear: fiat better watch out.
So is bitcoin in a bubble that's going to pop when the fad is up? I seriously, seriously doubt it.
Nima's Article on the Value of Bitcoin: https://beinglibertarian.com/fiat-money-system-can-explain-bitcoins-value/
Warren Mosler's website: http://moslereconomics.com/
Debt: The First 5000 Years by David Graeber: https://www.amazon.com/Debt-Updated-Expanded-First-Years/dp/1612194192/ref=sr_1_1?ie=UTF8&qid=1516823472&sr=8-1&keywords=david+graeber
Great article. Very eye-opening. I knew a decent amount of this information already but I am sure there are many on steemit that haven't heard about the government scam that is the modern monetary system. Keep up the good work!
I don't know how much of a scam it is outside of outright violence. Regardless of whether it's a decent system or not, understanding how governments create and give value to money is vital to making useful decisions about it. Most people don't just have bad ideas about macroeconomics, they have opposite ideas: what they think will inflate will deflate, what they think we boost the economy will crash it, and what they think funds it doesn't.
If we're going to understanding how to create money without government, we need to properly understand how the government does it in the first place.
I suppose that is true. We should look at what the government had done and is doing to create money and decide which elements to keep and which elements to drop or change.
This is definitely a very interesting article @volsci! I am interested in how we are going to be taxed in the future, as crypto becomes more prevalent in it's quest to take over fiat!
The part about the government spending before it taxes was interesting too! Is that how our government in America currently runs?
I am also interested to see how taxes are going to be handled in the future with cryptos. Although, the last thing I heard about the IRS, is that they're going to want you to report every single trade you've made in order to prove what you made or lost. Ungh.
This is exactly how government spending works in the United States. Each country varies a little bit in their flavor, but ultimately they all work the same way: government has to create the money before people can save it.
I'm in the process of making a series on this subject. You can check the first video out here if you're interested:
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