Wednesday, November 27, 2013

Paul Davidson — Bitcoin and MMT

What is Bitcoin? According to Modern Money Theory, bitcoin can not be money since it is not accepted in payment of taxes by any government — nor is it issued by any government via the governed purchase of goods and/or services from the private sector. So what is bitcoin in terms of MMT?? I do not know what MMT proponents would respond to this query?
Professor Davidson seems to be confused over necessary v. sufficient conditionality wrt state money aka currency (Chartalism), and money as an IOU that is transferrable (Innes, Minsky).

Requirement of state money aka currency is sufficient to create demand for the unit of account that the state issues as the sole provider. In this sense, currency is a tax credit. Other forms of money are not unless the state agrees to accept them at its payment offices. If it doesn't then they must be exchanged for currency for payment of taxes, fees, fines, or other financial obligations to the state required to be settled in the state's unit of account.

Any IOU can serve as "money" as an exchange medium if a counterparty will accept in exchange.

However, the rest of Davidson's post is interesting. Bitcoins are neither issued by any state, nor does any state accept them in payment of taxes as far as I know, and they are not anyone's IOU either, in that they are "mined" digitally as an analogy to precious metals, gold in particular. Is gold bullion money? Some would say yes. Others would say it remains a commodity that can be bartered for other commodities, unless it is minted and issued as a money thing. How does Bitcoin fit into this scheme?

Real-World Economics Review Blog
What is Bitcoin?
Paul Davidson | Holly Professor of Excellence, Emeritus at the University of Tennessee in Knoxville


21 comments:

Unknown said...

Bitcoin is an asset and is more useful than gold in that there is a finite amount and you can move it around easier via the electronic systems.

But ultimately if you trade using it, you will have to buy your state's currency to pay the taxes assessed at the conversion value according to the tax laws of the nation your reside in or are domiciled with.

Unknown said...

Bitcoin is worse then gold since it is a money hoarder's dream come true. But progress requires investment, not hoarding. Nor is it as good as common stock because it isn't backed by assets. Nor is it likely to last long because of new entrants into the field; and some of those will offer better value such as a share in the profits of new money creation.

In other words, BitCoin will help usher in the more widespread use of common stock as private money.

But, of course, nothing can compete with the government-backed counterfeiting cartel, the banking system.

Kristjan said...

Reading Davidson, is my understanding correct that if I order something and make payment with bitcoins but the order never arrives at my doorstep, then the state is not going to enforce that contract?
If so then this is the libertarian paradise.
I would be very carefull to invest in bitcoins, sounds like ponzi to me.

Ramanan said...

Tom,

I am not sure of your anger on Paul Davidson. His is a nice piece about the role of institutions and the market maker.

He just raises the question to the Neochartalists.

As to the question of necessary versus sufficient, I think it itself confuses the issue.

Neochartalists say money is a creature of the State so if you accept Bitcoin is money, then it is contrary to the statement "money is the creature of the State".

So for you to be self-consistent, you have to say Bitcoin is not money.

Kristjan said...

Imean this right here:
"Individuals can make all sorts of production and exchange (purchase) agreements among themselves — but only it calls for a money transfer to discharge the obligation, these contracts are not legal contracts. Thus I can agree to cut my neighbors lawn and he can agree to wash my car in exchange — but this agreement is not legally enforceable."


So if I get ripped off paying with bitcoins, it is my own business and state is not going to interfere.

Dan Kervick said...

The philosopher David Lewis gave a very detailed analytic account in his book Convention of the nature of social conventions, and applied the account to, among other things, an account of money as a conventional medium of exchange. Lewis's account has had enormous influence on all subsequent accounts of social convention.

To have a money system, it is not necessary that there some other asset for which there is a binding and credible legal guarantee of exchange of demand, i.e. redemption. It is perfectly well conceivable that some otherwise worthless asset might be generally valued among a population and accepted in exchange for goods and services for no other reason than that there is a well-founded expectation that others will accept it in turn. Nor is it necessary that there be some asset, debts for which can be legally discharged using the payment asset.

Of course, if the use of the money is tied to a redemption asset, and if there is such a framework of legal obligations and guarantees for redemption or debt discharge - including the discharge of tax debts that can be imposed by government fiat - and if these government commitments and regulations are well-governed then that form of money has a much greater chance of remaining in use for a long period of time and over a large territory, as opposed to a purely conventional medium of exchange.

And as a matter of actual historical fact, pure media of exchange have been rare and of short historical duration. In general, payment assets whose money status lasts a very long time, have been state-backed instruments. And the region in which they are universally accepted corresponds to a state jurisdiction.

Other instruments have been beset by frequent and unpredictable market value oscillations, and usually collapse in fairly short order.

Tom Hickey said...

So if I get ripped off paying with bitcoins, it is my own business and state is not going to interfere.

If a contract is entered into that is denominated in Bitcoin, I assume it would be enforceable at law, but I am not a lawyer.

Tom Hickey said...

Ramanan: "I am not sure of your anger on Paul Davidson. His is a nice piece about the role of institutions and the market maker."

No anger. I just said that he doesn't seem to know the MMT position, which more complex that "money is a creature of the state." That needs to be understood in context.

I think I acknowledged the rest of the post as of interest. If that did not come across that was the intention. But the reason I brought it up was owing to the MMT reference.

Ramanan: "Neochartalists say money is a creature of the State."

Chartalism is the historical argument that modern money did not arise out of barter as many conventional economists hold but rather the state issuing the unit of account required for payment of taxes. Keynes knew Knapp's argument and agreed with it. Abba Lerner as far as I know originated the statement, "Money is a creature of the state." MMT economists have repeated this. Lerner wrote a paper of that title, in which he is talking about the way money is used contemporaneously, not it's historical origin.

However they have emphasized that taxes are a sufficient condition and not a necessary one to drive the demand for the state's unit of account. They also cite Innes on credit money as most ancient and Minsky's statement, "Anyone can create money, the trick is getting it accepted." In this sense money as social obligation involving reciprocity and then more formally as debt is a social construct that is very ancient. I say that money is "an idea" to distinguish it from a thing.

The claim of Keynes and MMT is that "modern" money begins with the state's involvement. This is the Chartalist view, which doesn't deny or ignore the more ancient origins of money. We still use that form of money but now it is mostly denominated in and convertible into the state's unit of account.

There's a hierarchy of money, and generally speaking the forms lower on the hierarchy need to be convertible into a higher form to be widely accepted. Casino tokens only function as money in the casino or among those who frequent the casino and have use for them.
(continued)

Tom Hickey said...

(continuation)

Warren does not use the term "money." His business card model and the UMKC buckaroos are designed to show that money gets value by creating a demand for it through an imposed obligation. That could be through the state, through superior power as in company money that was used in debt servitude, or through a legal contract.

Randy says "taxes drive money" in the sense this is sufficient (not necessary) to create demand for whatever the state accepts at its payments offices sin settlement of obligations to it, e.g., taxes, fees and fines. In modern economies states require payment in their own liabilities in the medium of account and other forms of money as media of exchange must be converted to state money aka currency. which in a non-convertible system sits at the apex of the hierarchy of money.

But anything can be a medium of exchange that others will accept (trust). To be widely accepted it must be used in a way enforceable in contracts (legal sanction). Legal tender is a step up from there, if a jurisdiction has legal tender law, and state money is at the top in a non-convertible system.

So there are many types of money. However, in modern economies the hierarchy of money holds sway and generally speaking prices and contracts are denominated in the state's unit of account. Banks agree to convert their liabilities to currency on demand at par. Other forms of "money" float.

I left open the question about Bitcoin properly being called money. Davidson doesn’t think it is, for example. I am not sure if he argument holds in that the Bitcoin community calls it money and knows that it is not enforceable. For them, so far anyway, that is a feature rather than a bug.

My own position on the question as to what money is, is to look at the context in which the term "money" has been used historically and presently. Money is what people call money.

Kristjan said...

Tom I think there mighy be a bit of a problem here. The thing is, in the eyes of law, what is bitcoin? Can you assure me that it is anything more than tomcoin or kristjancoin. By the way kristjancoin is traded in my blog and there is only ten of those in the whole world. Really safe and complicated formulas behind kristjancoin. Now I transfered my kristjancoins to your unregulated account and you promised me a car for them. I never got the car so I am going to court because my life savings are gone.

I don't know if this is the case but I suspect It is like getting ripped off by a drug dealer. Who are you going to complain to?
here is an interesting article:
http://blog.heartland.org/2013/10/bitcoins-quixotic-search-for-legality/

Brian Romanchuk said...

I am unsure about bitcoin in particular, but barter transactions are legal and enforcable. (The issue with bitcoin is whether the court can adjudicate on compliance (was the bitcoin transferred according to the agreement?))

But the catch is that for tax purposes, barter deals have to be accounted for as a pair of transactions involving offsetting dollar transfers. This is because the deal has to be measured in terms of the unit of account of the state. (This is true for Canadian income tax; I assume the same is true in the U.S.)

In other words, in modern economies, the unit of account is a creature of the state.

Tom Hickey said...

But the catch is that for tax purposes, barter deals have to be accounted for as a pair of transactions involving offsetting dollar transfers. This is because the deal has to be measured in terms of the unit of account of the state. (This is true for Canadian income tax; I assume the same is true in the U.S.)

All transactions involving gain and loss, including barter deals must be reported on the tax form, where entries are only in the unit of account. This would also apply to bitcoin, and unlike cash there is a record of Bitcoin transactions in the digital system. You can bet that authorities will be cracking that system to monitor it. Anyone who thinks that Bitcoin is totally secure and secret is foolish. Barter folks though so too, until the big bust that occurred in the '80's, IIRC.

Same in the US as Canada, and the IRS has let it be known through enforcement and penalties that it monitors barter activity.

geerussell said...

I think Neil and Dan K pretty much hit the nail on the head.

I like to break it down along the lines of financial assets vs non-financial assets. Money is a use of financial assets, which have varying degrees of moneyness.

If you're trading non-financial assets for other non-financial assets, you're bartering. When one of those assets emerges as the most widely traded and accepted, like cigarettes in prison, it's still barter.

Bitcoin isn't a financial asset. It doesn't exist as a liability for anyone and has no issuer.

Matt Franko said...

I look at bit coin as a totally new form of an 'intermediary' currency that exists 'between' other currencies.... It only could exist with today's IT.

The historic academe is not the place to go for understanding here, they can offer NOTHING, this is uncharted territory.

Let's solely use OUR brains on this one....

RSP,

Dan Kervick said...

I don't think there is a problem in principle with the idea that a contract calling for payment in Bitcoins can be enforced.

But the whole selling point of Bitcoin is supposed to be its anonymity, which means that the parties to the contract are less likely to take their disputes to the government, and often the payee in a transaction cannot even identify the payer.

Matt Franko said...

Tom,

This is like the 'privacy' morons doing all their correspondence on gmail and then complaining when law enforcement has access to all their emails! LOL!

With bitcoin you can LITERALLY 'follow the money' and these morons think they are being evasive or something.....

What a bunch of rubes! Rsp

Tom Hickey said...

Kristjan, I was referring to a valid contract that is enforceable. A contract can be entered into to exchange anything legal with anything else legal as long as the legal conditions are met. In this case, I think that a contract involving exchange of an amount of Bitcoin for some other good would likely be enforceable legally.

Otherwise, you are taking your chances. But that is often the case anyway. A lot of people get ripped off because they cannot show satisfactorily that there was a valid contract, or something illegal or shady was involved.

The problem with Bitcoin could be that there is no trail that is publicly traceable as there is in most transaction. But this is an issue with cash transactions, too, as frequently happens in illegal and shady deals.

Kristjan said...

"Kristjan, I was referring to a valid contract that is enforceable."

Yes I understand but what It all comes down to in my mind is that what the legal system accepts as being a payment. Even ten push ups can be considered a payment. Would the legal system accept ten push ups as payment?

Tom Hickey said...

Is there a lawyer in the house?

Anonymous said...

There's nothing in the common law system that says a contract has to be denominated in government currency for it to be enforceable. A contract that stipulates payment in bitcoins instead of government currency would be enforceable.

I think the question people mean to ask is would a court order that a breach of a bitcoin-denominated contract be remedied through payment of bitcoins? And the answer to that is almost certainly no. In common law jurisdictions, the proper remedy for breach of contract is damages, which are assessed in the local government currency. There is a remedy known as 'specific performance' where the breaching party is ordered to fulfil the contract instead of paying damages, but that remedy has only ever applied to contracts for the sale of land breached by the seller.

Tom Hickey said...

Thanks.