Let’s go down and confuse their language so they don’t understand each other.-Genesis 11: 7
The intriguing job of economics is to show men how little they know about what they can imagine. -Frederich August von Hayek
A pricing system is an information exchange network. It works best when built on a globally shared neutral financial medium. As society becomes more complex, so does the need for neutral financial standards, which do not introduce noise into economic signals.
Knowledge loves company
One of the deepest insights into economics is to embrace the nature of Hayek’s pricing. In a short and readable essay entitled “The Use of Knowledge in Society”, Hayek explains why there would be no exchange without the existence of price – or a complex society.
Prices reflect the economic realities A modern economy creates billions of potentially-relevant pieces of information about people’s choices, investors ’risk appetite, lack of resources, production conditions of particular products, and so on. We need to share this information constantly to coordinate our efforts. As the great economist Leonard Reed noted, no single mind knows how to make even a simple thing like a pencil. Economic reality goes through constant change. Similarly, the price system is in constant flow, which makes it difficult to draw an accurate picture of what is actually happening. When prices arise in a seamless manner, they reflect reality and we can cooperate well. When prices are prevented from rising or adjusting freely – and thus no longer reflect reality – our ability to cooperate is hampered.
As Hayek says, prices interact with “knowledge of the particular situation of time and place”. Influential “use of knowledge in society” is not through books, TV or classrooms; It is the value system that is the main knowledge exchange network of mankind. And it’s amazingly effective.
A brief example. Turkey grows about 80% of the world’s hazelnuts. Now imagine something happening in Turkey: civil war, hazelnut blight, meteor strikes. How can the rest of the world know that something happened and that walnuts or peanuts should be used whenever possible? Not from TV. The skyrocketing price of hazelnuts first broke the story. Price communicates only the most relevant information: that hazelnuts have become relatively more rare. No matter where in the world hazelnuts are produced or what happened there, nuts are now more valuable and people need them economically.
“In short, by a kind of symbol, only the most essential information is transmitted and only to those concerned.” -Hayak
A pricing system is a minimally effective means of transferring knowledge. This allows us to collaborate globally, even if we do not share the same language, culture or worldview, because these issues are not important for economic cooperation. Price is our objective guide in our collective struggle for survival and prosperity.
There are billions of potential data that could be relevant to any manufacturing process, consumer decision or investment opportunity. Without the price to know the local situation, we would be in the dark. And that’s exactly what societies ended without a price system: from the Inca Empire to the Soviet Union, societies without a functioning price system became slave states that saw little progress.
Oh, that’s no money you got
We have already established that values must represent their underlying economic reality, in order to properly express economic signals. But prices often actively prevent it from doing so. There are three factors that affect how well prices do their work: how prices arise, how they promote and the value (meaning) of the medium that carries the value.
How prices arise: Values need to come out of the concept of private property, such as privately owned money and capital, land and buildings, machinery and technology, etc. There are incentives to use it efficiently, including private property. Rewards for good decisions as well as punishment for bad deserve those who are most acceptable among them. On the other hand, protecting property owners from making bad decisions – such as bail or subsidies – is a sure way to disrupt the pricing system, as prices no longer carry the risk factor. For a popular example of such moral danger, see The Big Short movie.
How Prices Promote: Even if prices come out volatile from the basis of personal property, price control can kill the signal before it promotes. In the twentieth century, one of the most popular forms of price control was rent control. The results of rent control are well illustrated by a popular quip from Swedish economist Asar Lindbeck, who compared its impact to the city bombing. This is because price rules, such as rent control, degrade capital; Prices have been kept below their actual market value, making it no longer valuable for owners to repair and improve their property.
Many are surprised to learn that the central bank’s interest rate manipulation is a form of price control. But the reality is that an interbank bank interest rate (which the central bank usually targets) is a kind of price, and central banks try their best to control this price to the key point (0.01%).
Neutrality of a financial medium: prices do not exist on their own; They need to be disclosed in terms of a financial medium. The nature of the currency unit plays an important role in how well the price system can do its job.
Suppose a kilo of hazelnuts cost 10 10, but then it went up to 11 11. Now if these prices emerge in the market economy without any government intrusion, the price increase may reflect two things: a decrease in the supply of hazelnuts or an increase in the demand for hazelnuts. Either way, market participants don’t particularly care to know the details until they register signals of increased hazelnut deficiency.
But while money itself is not a neutral measure, there is a third possible cause of price increases: an increase in money supply and a decrease in purchasing power. Also known as inflation: The problem then is that the economic reality has not changed so prices should not signal any change in the signal. But with inflation, the price process is distorted by noise and market participants adjust their behavior as if the signal is real.
Meaning with elastic supply is like measuring tape made of rubber; It does not measure anything accurately because internally it is subject to dynamic change.
A financial medium has to be neutral in order to function properly on price, but today’s Fiat means nothing more than neutral. Its supply is centrally managed by a state agency একটি a central bank পূ to meet arbitrarily set targets such as the rate of inflation on the narrow selection of consumer goods and services. Even the most stable fiat currency money supply today grows 5-20% on an annual basis, where this newly issued money hurts the economy causing chaos in the price system. We have a word for some of its consequences: the cantilever effect. But while acknowledging this barbaric effect, today’s activists have only scratched the surface of what is wrong with monetary policy.
Fiat monetary policy basically introduces a random number generator in the pricing system. It affects literally everything in our society: the nature of our jobs, our tendency to use it to build savings, and even our culture (I recommend listening to recent discussions between Stefan Livera and Siphedian Ammar).
The neutrality of financial means is much more serious than the limitation or price control of private property because it is a global phenomenon. We currently have about 1,180 national currencies and all of them are staffed, under a centrally managed monetary policy. It is no exaggeration to say that all Fiat currencies have a hyperinflationary path, where the only difference is the time scale at which it occurs.
The global nature of the Fiat standard is probably the main reason why the problem of money neutrality is widely recognized and not addressed, above all in the economics profession. The fact is that “everyone is doing it.” It is difficult to understand a financial medium that has not heard of such money for more than 50 years that is not regulated by the state. When money is defined as a “state-directed thing,” of course, only Fiat is recognized as money. Through this approach, all the problems of the current financial system can be solved through the introduction of quantitative easing, repo facilities, negative interest rates, CBDCs and many more experimental policies.
The result of human action, not human design
“The price system is just one of the formations that people have learned to understand when they stumbled upon it without realizing it.” -Hayak
The value system is the result of human action – millions of people use their property and follow incentives – but not human design. Attempts to design and manage these systems fail, they take the form of restricting private property, directly controlling prices or exploiting the basis of financial means.
It is foolish not to believe that a significant portion of mankind will realize the importance of the price system and protect it against interference. Much more realistic is the expectation that people will follow nothing else but their own personal motives to get out of the Fiat system and choose Bitcoin, as it ensures its value as a reliable repository of value over the years.
Bitcoin will begin to repair the price system as it moves from being a means of saving money to a means of exchange. This may take some time, as people will be encouraged to spend Fiat instead of Bitcoin as long as they earn their wages on Fiat. But it will happen nonetheless, following the up-and-down bitcoinization of Fiat fall pockets around the world, the consequence of global hyperbitcoinization.
Bitcoin as a neutral financial medium will allow the price system to function seamlessly and allow mankind to become a superconducting information highway.
This is a guest post by Joseph Totek. The opinions expressed are entirely their own and BTC, Inc. Bitcoin Magazine.