Written September 15, 2021
The goal of this article is to combine and build a coherent argument around the microeconomic concept of price that relates to the marginal cost of price (P = MC), Fiat money as a product, and Bitcoin. I must warn all readers that this is just a thought structure, or, as Steve Jobs puts it, “connecting the dots.” This is by no means a finished idea, and the community needs to be helped to develop and polish this idea, similarly I have taken this idea from others and hopefully, it has improved.
Before we go, a little reassurance for all readers: don’t worry, you don’t need a high level of math to understand the concepts described here. I will do my best to keep things short and simple. Without further ado, I hope you enjoy my little exploration of microeconomics, the Federal Reserve, and Bibitcoin.
First things first, let’s start with microeconomics. And I already hear you ask:
“General Kenobi, what are you talking about so much about this basic micro-economic concept?”
I’m glad you asked. The concept I am referring to is a basic microeconomic concept in general equilibrium (GE) theory. The GE theory is one of the first subjects that any student of economics learns, and with it the concept of perfect competition. Inside the perfect competition model there is a simple equation with potentially great effects: P = MC. The essence of this is that in a perfectly competitive market, the price of the product will reach and in the end will be equal to the marginal cost of the given product.
“But what is the marginal cost?” I hear you say.
In economics, every time you see “marginal”, it’s helpful to think of “next unit”. Therefore, MC is the additional cost of making / producing an additional unit. Under perfect competition, companies optimize profits by reducing MCs, and the market balance is therefore found in the lowest MCs, which is not a number equal to zero for ordinary companies.
Therefore, the basic idea is that under a competitive market, companies will optimize for their MC and the price of the given product will reach the MC. Thus, P = MC under a competitive market. And if you’re wondering why, the reason is that companies are encouraged to produce extra units if the MC is lower than the previous unit, because it presents an “extra return on the scale”. The bigger the better. But if the MC of an additional unit of production increases, it means you have entered the state of “reducing income on a scale” and are starting to lose profits. Bigger worse. This is under the assumption that companies are trying to increase profits.
But enough for that; I said I would try and keep it short and simple. Let’s look at the Fiat currency and why the US dollar is a product.
First, an interesting fact about our favorite Fiat currency: the US dollar issuer, the Federal Reserve is a private company, and its shareholders. Yes, the Fed is a private entity, complete with shareholders. Can you guess who these shareholders are? All right, bank. The share banks of the various private companies represented by the Fed can only be banks and the dividends generated by the Fed can only be received by banks. So, if the Fed is a company and has shareholders, they get dividends. What do they sell? What is their product?
Well, they sell money. That product. Everyone wants it, and despite popular belief, there are plenty of it. But, despite being so ubiquitous, most people just stop and think about it.
If you stop and think about money for a minute, you will see that money is a mere asset – certainly the most liquid – but another asset. And since this resource is provided by a private company, it is also a product. These are the Fed’s airpods. The Fed makes money to make cheap, maintains very good margins and is a super-seller.
Stay with me for another second, because now we see that Fiat Money is a product, but for us to combine P = MC and Fiat as a product, we must find out if the US dollar works in a competitive market. The point is that the money market is not a market of any kind. Due to the inherent exclusive nature of money it is not a common market, like the potato or corn market. What I mean by this is that consumers tend to choose the best form of money for themselves and throw away any other money that is not the best money. Thus, it is a binary monopoly market. You have the best money or you don’t have it, and if you don’t you throw away other money to get the best out of the money available. Thus, the Fiat currency market moves from exclusive to the next one.
But when people hear “exclusive” they think of either fun tabletop games or a competing market. As I see it, the currency market is not only an exclusive market, but also a competitive market. This is the most competitive market. Because if your country’s currency wins this binary currency war, the reward is endless. You become the world reserve currency, and the world bows to you. In fact, it is a competitive market in which the US dollar also goes by the term “petrodollar” and is protected by the most powerful (and most corrupt) entity on the planet, the US military.
Breathe in, the hard part ends. We have seen that P = MC, and we have established money as a product, and this product lives in the most competitive market in the world. Now, it’s time to roll! Let’s see the MC of money. At the time of the gold standard (a time in history when world trade used mostly gold-based currencies), MC meant the cost of acquiring gold. Well, that means that under this financial system, there was a verifiable MC of money – the cost of one extra unit of gold mining. And Fiat Tucker MC? Well, the cost of creating any additional amount of this resource that we call Fiat is as good as zero. Fiat taka MC, especially US dollar zero. Cost NADA. It’s almost nothing, nothing. A person presses a button, a few electrons move around and new money is created.
This effectively means that the US dollar has reached zero. And it has been going on for ages. One could also argue that under a gold-based system, similar to money over time, it is approaching its death. Historically, when empires were collapsing, the first thing to do was to devalue and increase their currency, gradually turning the MC of the currency / product into a fiat currency as soon as it reached zero. When the previous winners of the money market were weak enough, there would be a strong money cycle around the world.
I can talk about the motivation of the Fiat system, inflation, humiliation and what you have. But I’m the expert you’re looking for, or we haven’t talked about Bitcoin yet, so let’s see how Bitcoin interacts with these ideas. Well, making Bitcoin is expensive, and making each subsequent BTC will cost more than the previous one. This basically means that Fayat’s MC is always at zero and the market is slowly approaching it, Bitcoin’s MC is moving towards infinity and the market knows it.
Bitcoin has a verifiable value, it is not a product of any company and thus it is a limited and unchangeable asset and the incentives given in its protocol ensure that MC will never be equal to zero. Satoshi gave us a gift. We are all discovering it now!
We have high places!
PS: I know this topic is much more complex and deep than that. I may have gotten some things wrong, I may have simplified some ideas, but I believe that the mental structure that it creates is really strong. No one is there to survive, but what can be interesting to put around is to see how it happens. If anyone finds them interesting or gets any inspiration from them, I’ve put down some discarded paragraphs. Enjoy 🙂
This structure shows that BTC has reached the infinity of one US dollar value, while the US dollar is moving towards an abstract final value of zero. It shows almost the same negative energy as physics models. Just as negative energy is impossible in physics models and forces us to think outside the box, this mental model shows BTC price infinity in terms of US dollars is similarly impossible that forces us to think outside the box. We are all thinking of the same thing, a world where only BTC exists. Because we now live in a world where you don’t know if the person who gave you the cash worked for it, or just made it in thin air, but there is an alternative to this same reality. You decide what money you will use and so does the rest of humanity.
Until now, the mediating asset of all transactions was a centrally regulated corrupt currency that we usually did not think much of. In the near future, that wealth will be occupied by the best money, which we have all gradually discovered. An asset that no economic agent can create without significant and verifiable costs.
This is a guest post by General Kenobi Nakamoto. The opinions expressed are entirely their own and BTC, Inc. Bitcoin Magazine.