Bitcoin Lessons

Bitcoins have been one of the currencies of choice for those looking to ‘buck the system’, providing a way for libertarians, anarchists, and others to circumvent the global Central Banking cartel while simultaneously utilizing the free-market aspects of the internet to engage in trade.

However, on April 10th, 2013, Bitcoin holders saw the value of the virtual currency drop $100+ in dollar terms after climbing steadily for months from its $15 dollar value in January. (Boesler, “Bitcoin is Crashing”)

What caused this ‘crash’? How could a currency that is fixed in number terms gain and fall so dramatically? How can a near-‘Free Market (in reference to the internet) currency be subject to these things?

There are many aspects to the Bitcoin phenomena that can teach valuable lessons to libertarians.

Firstly, a firm/currency/good/service that is made available in the Free-Market or similar institutions such as the internet is not necessarily a perfect thing just because it is arrived at voluntarily or through the market. Many libertarians and anarchists tend to assume that any association or good that comes about through voluntary exchange in the Free-Market must automatically be good because of the efficiency of markets and lack of coercion. However, this is simply not the case: as for most things, there are always exceptions.

A man can work for the state and be a good man, and believe that he is doing good work. For example, many libertarians/anarchists might tend to think that all police officers are bad simply because they work for the state. This may be true with some officers but oftentimes it is not. If these same people worked in private security agencies under Free-Market conditions, the same libertarians would most likely approve of, and even look up to, these same men. It is important to separate the good from the bad in every market structure, mixed economy or not. Although the state does subsidize and allow for enhanced tyranny and corruption, it is simply dishonest and intellectually lazy to claim that it means that this is the case all of the time.

How does that relate to Bitcoins? Well, many libertarians and anarchists viewed Bitcoins favorably due to the fact that the state was not running the operation. This false assumption that Bitcoins were impervious to the same types of currency cycles that all other currencies go through (regardless of being centrally run or through the market) led many libertarians and anarchists to see their Bitcoin stocks implode within a day. (It is important to note that they still trade at a relatively high value, but a 50% fall in one day is obviously bad.)

Secondly, Bitcoins operate on a fixed amount, which is obviously quite different from the Federal Reserve’s elastic money supply. Elastic money supplies, contrary to what most libertarians believe, are not always a bad thing. Under free market circumstances, elastic money supplies would allow banks and currency holders to shift the amount of money in circulation to fit the demand for the medium of exchange in question as necessary. Banks that devalued their money too much would face currency holders abandoning ship; contrarily, banks that kept their money counts too low would not be meeting the demand of potential currency users, and therefore would need to adjust accordingly. Changes in population sizes or other structural changes in the economy would most certainly require different currencies and different currency amounts to suit the market.

That being said, currencies that are fixed in amount can serve as ‘safe’ currencies that check against and hold value for other currencies redeemable in it. For example, gold is relatively fixed in amount (fluctuations in gold supply are minor compared to most currencies that it used to be redeemable in.) For centuries, gold has served as a currency or commodity in which other currencies would measure against. Many markets accepted both gold and paper notes that could be redeemed for gold despite that one of the currencies was fixed and other, for the most part, was not.

Fixed currencies under freer markets can be god-sends and even hold whole economies together. However, markets dominated by central banking often move away from fixed currencies and commodities due to monopolized elastic currency heavily relying upon credit and debt expansion. Fixed amounts of gold do not serve monopolized currencies well due to the fact that there are no market checks on credit and the true demand for money.

The state, with a monopolized currency, is able to absorb power and property through money devaluation and debt enslavement. Under free market pretenses, elastic currencies would most likely not be able to lend out nearly as much money or devalue the currency to such a high degree as a monopolized institution could. Where a fixed currency in the free market may be able to give currency holders a way of keeping elastic currencies in check, it fails to keep up with the expansion of monopolized currency such as Federal Reserve notes.

Lastly, the Bitcoin boom and bust is clearly a market bubble. Some libertarians and anarchists forget that free markets are still subject to boom-and-bust cycles and that there would be tough times under the free market. So many of us have become accustomed to the state and its many failures and lack of success, almost to the point of blaming the state for everything wrong and praising the market for everything right. This is a dangerous way of thinking. Assuming that the market is always right can lead to downright apologism for free markets producing bad outcomes. Evidence does indicate that freer markets generally lead to higher standards of living; however, this does not mean that free markets (or free market entities) are always perfect.

References:

Boesler, Matthew. “Bitcoin Is Crashing.” Business Insider. N.p., 10 Apr. 2013. Web. 10 Apr. 2013.

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The Minimum Wage Fallacy

How Obama’s Proposal Will Have Unintended Consequences

US President Barack Obama

In the recent State of the Union Address, President Obama proposed a new solution to the rising poverty rate: a $9/hr federally-mandated minimum wage.

The declaration garnered a positive response from the crowd, and the public in general. Surely, this will solve the issue of poverty, right?

What President Obama, Congress, Keynesian economists, and many others choose to ignore is what kind of implications a wage floor can have on the economy. To explain these ramifications, we must first delve into the economics of labor supply and demand.

The Supply and Demand for Labor

Labor, as well as everything else in the economy, is subject to the laws of supply and demand – that is, the demand for a good or a service, as well as the supply of such goods and services, will work towards market equilibrium, maximizing efficiency and setting a market price. The market price signals to businesses and consumers alike the actual costs of what is being made available, be it food, shelter, clothing, luxuries, and labor. What many Keynesian/Liberal economists will have you believe is that labor is somehow outside of these laws, and ergo it is not subject to these laws; yet, labor is a service, which a business must purchase for it to operate (just as a business may have to purchase the services of a carpenter or an electrician, the business must also purchase your labor from you, and it is calculated as a cost in the business’ spread sheet.) Just as all services have a market price, so does your labor.

Consequently, when a price floor is established in the labor market through the passage of minimum wage laws, excess supply of labor is created. Businesses are not willing to hire as many workers for a higher price, and thus, cut down on the number of laborers they “purchase” in the labor market. If, say, the market price is $5/hr for unskilled labor, and a minimum wage price-floor of $10/hr is instituted, then firms will only be able to hire half of the number of workers that they would otherwise employ. This example, albeit simple, is exactly the type of an effect any type of price-floor has on the economy. The business then faces a tough decision: Do they hire less workers? Do they fire some workers and keep costs the same, but lose production-capacity? Do they “eat the costs,” so to speak? Do they push off the costs onto the consumers?

How Adjusting For Inflation Won’t Work

There is a common argument made for the minimum wage that entails raising the base wage that workers must be paid in order for them to keep up with the rising costs of living (due to inflation.) At first, this sounds like the right thing to do: if the wage is increased at the same rate of inflation, then true costs will not rise, correct?

Wrong. Inflation is a tricky thing; it distorts the prices in a market, which act as signals to people and firms about the supply and demand for various goods and services. There are three inherent flaws in adjusting wages for rising inflation:

A) The way that the BLS calculates the Cost of Living Adjustment (C.O.L.A.) is flawed. The rise in prices that are monitored in the COLA are based upon a fixed basket of common goods, which composes the Consumer Price Index (CPI.) The issue with monitoring this same basket of fixed goods is that the various inflation rates of these products (apples may rise 33% opposed to bananas only rising 24%, for example) is that consumers typically substitute cheaper goods for goods whose prices rise significantly. Joe Consumer may consume less apples and consume more bananas, so he wouldn’t be spending nearly as much money as the CPI would make it out to be. This misleads government officials and distort Social Security payments and other forms of welfare all the time; one can make the assumption that the wage rate would follow the same path. It may be that the Government would overcompensate or under-compensate workers for their wage, because they would have no true way of knowing what the right wage-floor should be.

B) Different regions experience different prices. California is notorious for its high gas and housing prices, opposite of North Carolina, which has a relatively cheap cost of living compared to the Golden State (no pun intended.) Making a blanket minimum wage for the entire United States disregards these differences, and may pay Californians too little and pay workers in North Carolina too much (and by too much, I imply that workers who would otherwise have been employed in North Carolina would be out of the job while others are overcompensated.) As it was established before, absent of a price-floor for wages, these regions would have their own relative equilibrium wages, accounting for the relative supply and demand for labor in those places. Therefore, adjusting for average inflation across the United States will not account for the differences in prices in the various regions and markets.

C) Most importantly, adjusting the minimum wage subject to inflation rates does not account for how businesses interpret Revenues and Costs. Again, prices act as signals to firms and consumers about the relative supply and demand of goods and services in the market. Higher labor costs signal to firms that it is costly to hire workers and that it would be in their own self interest to scale back on their demand for labor (just as a consumer would scale back on their consumption of an expensive product, it works the same way.) Costs for a business are much like costs for a consumer in that they both interpret higher costs as a function of supply and demand, and not as a function of inflation of the money supply. Although inflation of the monetary base may be causing a higher asking price for labor, businesses will most likely view this as either a drop in the supply of labor or an increase in the demand for labor by other firms. This is how the business will interpret its costs. Where it gets interesting is in how businesses interpret their revenue. Inflation of the money supply will increase the amount of money chasing the amount of goods in the market-for businesses, it will appear as though demand for their products has actually increased, when in reality, it has actually stayed the same. The lag time it takes for businesses to increase their prices to match what they think is an increase in demand causes firms to interpret the higher revenues as just that-higher revenues-and not inflation of the prices due to an increase in the money supply. This creates the disconnect between wage rates and selling prices: the business will interpret its higher labor costs as an increased demand for labor in the market, while simultaneously interpreting the higher revenues as an increase in demand rather than inflation. Why is this important? Businesses will react to a minimum wage (even if it is adjusted for inflation) as a price floor, and not a shift in prices as a whole. This will cause an excess supply of labor, unless the new wage is precisely what the equilibrium price for labor would be absent of the regulation. Even is the latter is true, it still would not allow anyone to be hired below that level, however menial the task. These jobs would otherwise prove beneficial to the market, but are nixed in the name of fairness.

Who is Affected by Minimum Wage, and Why

Believe it or not, a minimum wage affects everyone. Although one may not experience the affects of a minimum wage directly, they will experience higher prices at the stores they patronize and the services they buy. No matter which path a businesses chooses, it is almost guaranteed that the prices of their product will rise. If the business decides to cut their work force, their production-capacity will fall, and thus the supply of the good or service they make available will be smaller, causing them to charge a higher price. If the business chooses to just “eat” the cost, then their profits will suffer, and they will have a harder time financing their businesses and increasing production in the future (which will most likely cause a rise in prices in order to finance any future business ventures.) Clearly, the imposition of a minimum wage on the labor market affects consumers and businesses alike.

But, what of the workers? How does a price-floor on labor affect them? Well, some workers will be better off, in that the lucky few who are allowed to stay under the payroll will see a definite boost to their income; however, these are the workers who are more efficient and offer their employers more production. Such workers would most likely be in line for pay increases anyways, given that they provide enough of a benefit to the business that they should be compensated for their added efficiency. What is not seen is the teenager or the unskilled worker who would be more willing to accept a lower wage in exchange for the ability to acquire useful skills and increase their own worthiness. These workers are dependent upon the availability of low-skill low-wage jobs that exist outside of a hampered market-these jobs lay the foundation from which their skills and their résumés are built upon.

The Vicious Cycle and the Actual Solution

Now, as one can see, the imposition of a price-floor on the labor market has some dastardly effects on prices and employment. The next step for the state, naturally, is to blame businesses and the market about the increased inefficiency, rather than recognizing the inherent flaws of the Minimum Wage. This brings many politicians to adopt even more radical policies or market alterations that further exacerbate the existing problems in the economy. No matter how it is spun, all workers will not be able to enjoy low prices and high wages. Where true economic improvements are made are in the increases in production capacities of firms that drive costs down and makes more available. Increasing labor costs for businesses by raising the minimum wage hampers their ability to increase their reinvestment. Many are unable to recognize this, and only think of the economy as a single pie that must be divvied up and spread around. If this was true, then the production capacity of cavemen in the early days of human history would be the same as today, since their would only be X amount of work and production that could take place. The truth is that work and production capacity is nearly limitless, and has to be improved upon with reinvestment and innovation. Where the focus should be placed is in the Federal Reserve and how the inflation of the monetary base is leading to many of the problems we are experiencing in the economy today.