TL;DR: Money, Economies, States, Taxation and Bitcoin for Dummies was originally published by Shammah Chancellor. Money, though ubiquitous, is a poorly understood technology. Few people think about money from a systems viewpoint. We see money pass between people so frequently we rarely stop to think about the process. This exposure leaves us desensitized to the technological marvel that is money. Anyone wishing they should have more money should first strive to understand money from a systems perspective. Every citizen should properly understand their daily tools. Those that do not understand become the economic victims of those that do.
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Money, Economies, States, Taxation and Bitcoin for Dummies
The function of money
Money is a fundamental, and requisite, technology that facilitates economies of scale. Money provides a common measure for exchanging goods. This takes the place of un-scalable reciprocity. Without money, we would be unable to have the large and plentiful societies of the modern age.
Money enables economic scale by providing an approximate solution to the economic calculation problem via its exchange[¹]. It can be argued that this is the most efficient solution to the problem. However, money can only perform this function in society if the value of a currency unit is stable — that is to say, its value is not changing relative to the average value of the aggregate of all other items. Additionally, by being a stable measure of value, it enables us to store up past labor, and have faith we can buy necessities in the future.
Money has historically taken a number of forms. Metal coins were used in some eras, while other common necessities were used in others. For example, Salt was used as currency in the past (in fact the word salary comes from the Latin word for salt). Today, in prisons, cigarettes and other items are used as commodity money. Even laundry detergent is used as a currency in some economies. These monies are called commodity money.
Unfortunately, the value of commodity money is unstable because the production thereof is unregulated, and consumption is also unregulated. This can lead to wild changes in the value of the commodity relative to other goods; possibly leading it to be a poor store of value. For example, mined goods such as gold, or salt, may drop in value upon the discovery of a new source. This can have serious economic consequences.
The relationship of government to money
Additionally, the unregulated production of commodity money is a problem for state governments. Prior to spending, they must first procure the commodity money. This burden to government leads to the invention of fiat money[²]. In our modern era, the existence, production, maintenance of fiat money is taken for granted. Very few people question why money exists.
If you were to start pondering money, you would soon begin to wonder: Why do some people get to literally make money, when I have to work for money? Why can’t I print money? How do I become someone who gets the benefit of newly made money? These are questions everyone using money should have — and the answers to these questions depend upon an understanding of the broader economic system, and how state actors derive their benefit from fiat currency.
Now, we often speak about money circulating in the economy, the velocity of money, economic gradients, and other such terminology. We also apply these words to rivers, electricity, and other things which can be seen as flowing from one place to another. This is no accident, in fact the word currency means “that which runs.”
Similar to how we speak about electric currents, the analogy is also useful. Much like electricity, or water, money flows from one place to another between economic actors. If money flows from one actor to another in the economy then there must also be some statistical laws to model these flows.
When looking purely at government fiat currency, it may seem confusing that money would flow at all as there is no natural demand for it[³]. In contrast, gold and salt both have a natural demand, and come from the earth and are hoarded or consumed. So, in order to create a demand for fiat, governments must demand taxes and provide other services in return for the very money it creates. Without taxes, fiat currency is inferior in utility to many other commodity monies. This burden of taxes necessitates a sovereign claim on violence within the areas that the currency is being used. This transforms a government into a state.
Now, with the burden of taxes, the people subject to a state will gladly accept paper money en lieu of physical violence. This allows the state, and its beneficiaries, to motivate the citizens to produce what the political class wants. These ideas form the basis of Chartalism, and later Modern Monetary Theory (MMT). Returning to our analogy of water and electricity above, these taxes act as both a potential difference, and as the resistance.
The state is now responsible to ensure a stable value of money, and a constantly growing set of subjects for the state to control. It primarily has its tax rates, and its interest rates, to attempt to do this — both blunt tools at best. However, in the hands of careful economists, it may be possible that the goals of the state, and the practical function of the money for citizens, are optimized compared to commodity money. (In the hands of bad stewards, we end up with situations like Greece, Venezuela, and other such tragedies.). All fiat economies eventually fail — but it is possible that these economies are able to support larger scales than commodity money would otherwise enable.
Now, many of my friends are anarcho-capitalists. They believe that taxation is immoral and imagine a social and economic system free of a state. In their system, order is not kept by the state, but is instead based upon on the non-aggression principle, and other societal agreements. They believe that this society, free of taxes and states, would more efficiently meet the needs of every human being. Indeed, the word tax originally meant “a strain or heavy demand.”
Their belief that taxes are immoral is obviously true, as for an individual existing sovereignly there are no taxes. There is no legitimate authority that should claim the ability to tax the labor of another person. Only if a person believes that they can be the benefactor of taxes, or they believe that the ends justify the means, could they possibly argue that taxes are moral.
However, the reality is that taxation is currently ubiquitous, because states are ubiquitous (The ubiquity of states should probably cause you to surmise that having a state is the true Nash equilibrium of an Anarchist system and we live still live in anarchy). Taxation has historically been imposed upon us by other people, which we call a state. Even individuals who claim taxation supports government services and defense, often would prefer to pay less taxes themselves.[⁴]
Now, some people believe that states are necessary to steward public goods and keep order. They might still dislike taxes, and believe one alternative is that the government can just print more money to pay state employees each month[⁵]. However, this ignores the fact that there needs to be a reason to want the money in the first place (a potential difference) (e.g. the threat of violence through taxes). There is also the problem of inflation, which destabilizes the value of the currency and inhibits its ability to function as a useful measurement device[⁶].
So it seems with existing monetary technology there is no escape from the inevitability of having a state due to the need of stable money, and the ability to avoid paying taxes if there were no threat of violence.
Bitcoin, enter stage right
In 2009, Bitcoin was invented. If you’ve understood the above, then Bitcoin becomes an extremely interesting technology with possibly world-changing consequences. It has some extremely interesting properties that could change the way we interact with each other, and with governments.
Foremost of these properties is that bitcoin can be issued, maintained, and the infrastructure paid for without the use of violence. Transactions include a voluntary fee this is offered and any miner, and any wishing to do so may collect those fees by processing your transaction. No violence is required to ensure the payment of these fees. This lack of violence enables high economic efficiency and increases the velocity of money for an overall bigger possible economy.
Secondly, the issuance can be trust-less, and given to only people who are directly providing useful work to the economy (miners). This enables us to be sure that those who manage the money do not start giving themselves an unfair portion of new currency.
Thirdly, everyone knows the issuance schedule, and that it is reduced over time until there is a maximum number of 21 million Bitcoins. This means that the value of a Bitcoin fluctuates with the size of the economy that it supports. Those who did work growing the economy, keep their percentage-wise share of the economy as time passes.
Finally, given reasonable growth of the economy (notwithstanding the current adoption period) the currency will maintain a relatively stable value. In the case that it is growing in value, Bitcoins are precisely divisible unlike other forms of money. This allows for high resolution value transfers when compared to other technologies like commodity money, or fiat money[⁷].
However, in January of 2017, Bitcoin became so popular that it could no longer support the sustained usage of the economic activity relying upon it. Unfortunately, Bitcoin is not controlled by any one group of people, and 90% of the ecosystem believe that Bitcoin is best when it is limited to a small number of users — even if that means stopping economic growth. Therefore, it became impossible to continue to expand Bitcoin’s economic capacity.
In response, some software engineers created Bitcoin Cash in August of 2017. The purpose of this new, independent currency, is to increase the economic capacity of the Bitcoin protocol to be able to support the economic activity of all human beings. A majority of those who see Bitcoin’s primary purpose as being to increase human prosperity have migrated to our project.
We hope you will join us as well.
[¹]: Creating a sort of swarm intelligence
[²]: The first widely used fiat paper money called Chao
[³]: You can easily imagine this to be true, as if you started printing your own currency you probably find that you have a difficult time getting anyone to accept the paper in return for goods and services.
[⁴]: The claim that the government needs tax revenue in order to raise money is clearly erroneous. The source of fiat money is originally the government, and if its wish was for money, it could simple keep it. Rather the government wants you to want its money. In order to do that, it must levy taxes upon you with the threat of violence if you do not pay.
[⁵]: Some people argue that the implications above, and those of MMT, that government debt doesn’t matter and it can spend as much as it wants. This is wrong, as inflation still impacts the economy and must be considered when increasing government expenditures. This is called a seigniorage tax.
[⁶]: Additionally, like with gold or salt, if inflation is too high relative to the tax burden, then some non-state actors can, over time, acquire a horde of currency which dwarfs the current government expenditures. If they choose to release this currency into the economy, temporarily devaluing the currency. The state subsequently will be unable to meet its current obligations and either need to enact austerity or attempt to print more money. In the case where it chooses to print money, runaway inflation becomes likely
[⁷]: Another important aspect of Bitcoin is that it is not tokenized debt, rather it is tokenized work. The ramifications of this will be left for another article.
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