Monthly Archives: April 2020

Why Karl Marx would have liked Bitcoin

imagesBitcoin was launched in 2009 as a Peer-to-Peer monetary network with a blockchain technology which can be used to send money to another party without going through a middle-man such as a bank or a money-institution.1 Many young people were back then familiar with the P2P concept thanks to programmes which enabled users to share files. A P2P network is independent from a central server and its existence relies on the network of its users. It is in this way that Bitcoin gets its value. When someone says I’m buying Bitcoin, they are actually buying part of the Bitcoin network – the more money is put into this network, the higher its value. At the time of writing, the Bitcoin network cost €114.3 billion which equates to the total amount of value of all Bitcoin held. This does not include the multiplier effect of this Bitcoin network which includes brokerage companies and Bitcoin financial institutions, but includes the value of the miners who produce Bitcoin by mining it through complex mathematical equations. The value of Bitcoin can only increase if more money is added to the network because the supply of Bitcoin is capped at 21 million units. The Bitcoin digital network itself is by its own nature a security-function against digital attacks known popularly as hacking, however online brokers and financial institutions storing or owning Bitcoin may be more prone to hacking and digital attacks.

Karl Marx would have liked Bitcoin. Marx is one of the most misunderstood economists and philosophers in the world. Unfortunately, the theories and philosophy of Marx have been mostly understood and interpreted across the world through the lens of the Bolsheviks, namely Lenin, Stalin and Trotsky. This polemic may be the subject of another essay some other time.

Andrew Kliman is one of the few Marxist economists whom I prefer against the mainstream Marxist traditions. Kliman offers a very rational and literal interpretation of Marx’s Capital. Das Kapital is Marx’s magnum opus, but it has often been obfuscated with Marx’s own political work such as the more popular The Communist Manifesto which was commissioned by an international political association of workers called The Communist League. Readers of Capital should simply take it as it is: a deep and technical critique of the capitalist system, and when one reads Capital in this unbiased way, one can only be fascinated with Marx’s insights on the abstractions of capitalism.

As Kliman rightly points out, in Capital, Marx did not say that capitalism was to implode, and neither did he say that the rate of profit would gradually decrease to the extent that capitalism would stagnate permanently. Marx put forward the case that when technological innovations decrease labour-costs and increase productivity, surplus-value may increase and the rate of profit decreases.2 It is logical that if you want to make profits, you need customers, and customers are possible only if wages are paid and workers have money to spend. Furthermore, as Kliman correctly points out, Marx’s distinction between commodity-value and the price of the commodity was theoretical and in the real economy the two are interchangeable.3 Marx defined the value of a commodity according to its labour-time, and Marx’s contention with capitalism was that labour-value is artificially suppressed to create surplus-value.4 When one takes this logic in a literal manner, most of the economic stuff written about Marx’s theory of value which argues that capitalism produces two distinct values of the commodity is irrelevant. The second most important critique Marx makes of capitalism is that the concept of supply and demand in capitalism is not natural, given that demand is only conditioned by the supply and velocity of money and not by real and tangible demand. One can logically explain this by saying that if people had more money, they would spend more.5 The supply and velocity of money in the system is regulated by various means – namely credit, banking and interest-rates which in turn help regulate commodity prices and wages.6 When the general conditions of the economy reflect increasing commodity prices and people do not have any money to spend, an economic crisis is created which requires a readjustment in the system so as to increase the rate of profit. One way of adjusting the system is by issuing cheaper credit by lowering interest-rates.

Marx criticised the general notions and concepts adhered to the capitalist system, and clearly, Marx had a contention with how labour was valued. Marx’s contentions were made when workers lived very grueling lives and their wages were only meant to supplement their most basic needs. Those were the times of the industrial revolution, the child-workers, the dirt and disease, the poverty and hand-to-mouth subsistence life.7 Marx saw that the way the monetary and financial systems were constructed in capitalism favoured first and foremost the capitalist class. This does not mean that Marx was against the concept of money as a universal measure of value, in fact Marx made fun of Proudhon for proposing a system based on bartering.8

Briefly, what Marx saw was a gigantic financial and monetary system, run by a capitalist-class and regulated by a compromised government which enabled the same capitalist-class to accumulate even more capital and appropriate more resources. The private bankers and financiers were for Marx some of the most powerful players in the system so much so that in many cases they appropriated the resources of the capitalist, industrialist and merchant himself. On the other hand, the labourers were unable to determine their own labour-value let alone decide how this gigantic financial system worked. Marx never proposed any practical solutions for the creation of a society based on what he described as the “mode of production of associated labour”.9 Politically, Marx believed that the system had to change in its entirety, but after spending those years producing his lengthy critique of capitalism, Marx did not have enough time to creatively explore new and practical alternatives.

The founders of Bitcoin have, unwittingly, addressed one of Marx’s greatest contentions with capitalism – that of creating artificial values based on the needs of profits of one particular class rather than on natural and intrinsic values. Given that the value of Bitcoin is inherently based on the amount of money put into it, there can be, in theory, no artificial manipulation of the price of Bitcoin, in contrast to fiat currency, for example, where quantitative easing or other measures may influence the value of the currency. Simultaneously, Bitcoin is a monetary instrument inside another monetary system and is co-dependent on the mother monetary-system. Bitcoin is measured against fiat currency, like anything else, and one needs a bank account to extract the value of the Bitcoin but it is also this fungibility that makes Bitcoin potentially valuable. Founders of the blockchain technology have emphasised the argument that the monetary success of crypto-currency, namely Bitcoin, is simply that of buying the value of social scalability.10 This basically means that when I buy Bitcoin I believe that more people will buy it later and therefore its worth would increase.

One could argue that given that the price of Bitcoin has increased exponentially during the last ten years, being currently worth €6,242 at the time of writing, Bitcoin has been a massive success in social scalability. Indeed, many people made money from Bitcoin, but today it seems that Bitcoin has become a speculative instrument, so much so that in the recent weeks it has been correlated to the stock-markets.11 The excessive volatility of the Bitcoin price makes it unattractive to people who would want to use it as a store-of-value, and a safe-haven asset, and in fact, gold as of now, marching slowly once again to its all-time-high, seems to remain the preferred safe-haven asset to investors. Bitcoin has proved that it could create value by itself due to social scalability and without direct interference from government institutions, however Bitcoin as of now remains an exotic financial and/or monetary asset. The number of total Bitcoin owners in the world f have been estimated at 20 million12 to 25 million people.13

Could Bitcoin serve as a financial asset in a similar way to the traditional concept of bonds? Due to quantitative easing, and low interest-rates we have seen bonds turning into a speculative instrument and savers have been punished. Ordinary people no longer have the opportunity to receive some returns from their savings unless they risk their money in the equity market. It would be very difficult for Bitcoin to be considered as a safe investment if speculative capital drives up and down the Bitcoin price so violently in a short amount of time. Speculative capital in Bitcoin can only be counteracted in Bitcoin by exponential scalability which can either occurorganically or by strategic government use of Bitcoin itself.

Governments could make strategic use of Bitcoin to increase consumption in the economy and increase wages. For example, governments can buy Bitcoin units and then allow their employees to be paid from government’s Bitcoin supply in Bitcoin units. If European governments coordinate such schemes together and thus simultaneously attempt to stabilise the Bitcoin price, the large scalability of such use would exponentially increase the value of Bitcoin and the money held by people. Similar methods can be applied to financial aid packages and social relief payments during the current economic crisis. Naturally, such an international and strategic effort could only be made by an institution such as the European Union or the US Government.

Marx would have liked Bitcoin because he would have probably considered it as a way by which to appropriate value from a monetary-system which first and foremost served the interest of the capitalist classes. Bitcoin does not solve Marx’s dilemmas on value, but helps address it by offering a window of opportunity into an alternative monetary-value system which may rely only on the network of its users rather on large institutional or financial entities. Marx would have probably called Bitcoin “an associative way how to appropriate value from the capitalist-monetary system”. It is with great irony that most of the issue that Bitcoin maximalists complain about, namely the central-banking system, the debasement of currencies and inflation, the government’s appeasement of big financiers and the banking industry, were all targets of Marx’s deep critique of capitalism. I have no doubt that if Marx was alive today, he would have bought Bitcoin.

Disclosure: I own Bitcoin

1Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, 2008. Downloaded from http://www.bitcoin.org

2Andrew Kliman, Reclaiming Marx’s “Capital” (Lexington Books, 2007), 30-31.

3Ibid, 32-38.

4Capital Volume 1, Chapter 3.

5Capital Volume III, Chapter 10.

6Ibid.

7Readings which may provide details on the economic conditions of the working-class in the 19th century include Friedrich Engles, The Conditions of the Working Class in England, Henry Mayhew, London Labour and the Poor and E.P. Thompson, The making of the English working-class.

8Capital Volume III, Chapter 36.

9Ibid.

10Nick Szabo, Money, blockchains and social scalability, 2017 http://unenumerated.blogspot.com/2017/02/money-blockchains-and-social-scalability.html

It looks ugly for Europe

Now, first of all let me make some things clear. I’m not an economist, but a historian who studied economic history. And that is very different from being an economist.

As historians we are trained to look at things from the viewpoint of long stretches of time.

While politicians scramble to come up with knee-jerk reactions which are also acceptable to the public, historians have the privilege to sit back and analyse matters in depth and in this way, I have the privilege to write things which may not necessarily go down well with the public or anyone at all for that matter.

Secondly, I’m not here as a prophet of doom. I sincerely hope that in everything I say, I will be proved wrong. History can help us understand what is going on, but it can also help us understand the probabilities of the future. I will share with you what I see as a historian and try to provide the probabilities of the future, in the briefest way possible.

So, in order to be brief and simple as possible I will say very clearly that things look very ugly for Europe.

This is not an economic crisis like any other and it is, without any shadow of a doubt, the biggest crisis we have experienced so far in our lifetime, and may probably have adverse political, economic and social impacts that exceed those of even the 1930s Great Depression.

Since the 2008 economic crisis, both the Federal Reserve and the European Central Bank addressed the economic crisis by injecting more liquidity into the financial system in various ways. Banks were saved, financiers and traders made easy money, big companies could take cheap loans and governments could keep on spending. Governments in Europe continued loading up on debt but the man in the street seemed to be missing out on the big financial packages being thrown away so easily to save the financial system. Young people were faced with new challenges, such as exclusion from the property market with soaring home prices and austerity politics hitting the most vulnerable, such as pensioners and single-parents.

When Greece imploded, the EU failed to provide it with a sensible programme of economic support and Greece remains today in economic shambles. Italy, with alarming levels of both private and public debt, looks like it’s heading into a similar Greek scenario.

Then there was the Brexit rebellion. The Euro keeps losing its value as does the geopolitical clout of Europe itself. As of last year, Germany’s export drive lost steam as China’s economic growth subsided and signs of a looming economic recession were all over the place.

At the same time, while all of this was taking place, the far-right in Europe has become mainstream once again.

Last, but not least, the immigration crisis is challenging our moral and rational principles. It looks like the 1930s, but hopefully I am wrong – bad politics, bad economics, the rise of the far-right and an increasing number of disenfranchised workers.

This doesn’t mean that history repeats itself. First of all, Europeans are by far much less trigger-happy than they used to be. We are now much more aware of the dangers of war and racism, and no one foresees the probability that Europeans would go to war with each other again.

But what we are clearly seeing, is this: since 2008 our politicians have been using a textbook economic and financial response to economic crises that crop up, supposedly, unexpectedly.

This time around, we will be using the same text- book measures again, only on a much bigger scale than previously.

I suppose it’s naive to think that if we apply the same measures we have applied during the last economic crisis, we will be getting a very different result, but maybe, eventually all the liquidity in the system will stick and things will stabilise on a permanent basis. They may well do for some time, but what will happen if say, in ten years’ time we are faced with another economic crisis?

Shouldn’t we also get used to the idea that when we come out of lockdown and the pandemic is over, we are going into economic recession and Italy will be at risk of imploding? It is not in our political and economic interest that Italy goes into an economic crisis, but it seems that risk is being underrated, and this should not be the case given the potential political risks if such a scenario occurs.

We are taking huge risks without knowing exactly where we are going to land. We are in uncharted territory and we need a very elaborate and definite navigation plan. Truth is: we don’t have it and politicians themselves do not necessarily know what they are doing. We are in a very tough bind here.

Malta should not be so averse at the idea of the Eurobond, but we should also start looking for more practical solutions. It’s pointless to toe the line at this point when the whole house is on fire. While we put out the fire, we should also start coming up with very well-structured plan for the future.

I’m not saying we need to be idealists. Yes, we should take in more debt to issue much needed economic relief, and even increase public spending, but in the meantime, we should also start planning for the future and have the capability of having more options at hand, given that the world tomorrow is going to be a very different place and we don’t know how is it going to be.

In Malta, specifically, we are exclusively using a European textbook solution. This European textbook is a crisis-by-management system where the ones most benefiting are big companies and banks, while small businesses get crushed and workers feel most of the pain.

Is the system broken? Most probably. Malta, apart from taking ownership of the risks and effects of the Euro’s financial system, is also risking having its financial services industry shut down by the EU – sounds like a very bad deal if this happens. This is a particular crisis and we need surgical solutions for it.

For starters, locally, we can minimise most of the damage by temporally conditioning banking policy: introduce debt jubilees, reduce existing interest rates, clean up the balance sheets, and yes, why not? Let building contractors and big property speculators default on their loans to flush out rent-seeking capital from the system.

At their current state, no one wants to own Maltese banks any way, yet they are a strategic asset which are essential to provide much needed relief to small businesses and workers at this critical stage.

And without any doubt we should also move in to cancel contracts with Electrogas and Steward and immediately appropriate all public assets which have been given off through corrupt government contracts.

Although I write all my words here with healthy scepticism and self-doubt, I write this next postulation with a lot of conviction: the legalese we are told about being unable to appropriate public assets given off under corrupt contracts is total bullshit.

Any driven lawyer can create strong cases for the right political decisions in these cases, however the problem is that our professional and academic class is totally compromised in a system of jobs, networking and government contracts.

I’m afraid there will be hardly any economists or lawyers who will compromise their careers with solutions which may hurt someone in office or on the board of a big company.

I digress. Once the liquidity was out and the financial relief enacted, Maltese politicians are more interested in holding meetings with Sandro Chetcuti and discussing the opening of spring hunting, so they aren’t going to save you.

And in ten years’ time, we’ll be doing a big disaster clean-up by ourselves.

May I be proved totally wrong.

https://www.maltatoday.com.mt/comment/blogs/101484/it_looks_ugly_for_europe?fbclid=IwAR1iAL3Hmh5uvTFSBUAs7AdWsx2cC00X-0HjF5V-s7Y6PHwj43rtncVmcqs#.Xor6mJ9fgqo