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“Bitcoin, impressive but flawed” – Anthony Migchels

In an analysis well worth reading Anthony Migchels treats the promise of Bitcoin’s peer to peer architecture as well as one of its prominent flaws, its deflationary dynamics. Read it here.

My own previous post discussed these and other points.

Mutual credit systems address the insufficiency issue that bitcoin suffers from, while demurrage charges, perhaps from backing systems that charge the currency holder for storage and degradation of the backing material, can be part of a means of addressing the problem of balancing inflationary and deflationary pressures, along with the need-driven currency creation of mutual credit.

Video from Deeper in debt talk by David Graeber

The talk consisted mostly of some of the highlights of his book Debt: The First 5,000 Years. Highly recommended whether or not you’ve read the book.

Video on socialcam

The bow-tie, the law of requisite variety, and the global economy

John Robb has written an essay viewing the consolidation of the global economy as an instance of the bow-tie formalism from the theory of control systems. Here’s a diagram of the idea as applied to adversarial situations in human society, usefully melded with concepts from John Boyd’s OODA theory of adversarial interaction:

There are a few very significant implications in viewing the global economy in this way that bear explicit emphasis:

  • The center of the bow-tie has an adversarial relationship with the rest of the environment;
  • The heirarchies on either side of the bow-tie that place the resources of the environment at the disposal of the center and impose the decisions from the center on the environment serve to buffer or isolate the center from the environment’s complexity by pre-emptively reducing the complexity of the inputs and translating the simple goals of the center into more complex actions on the environment to attempt to enforce them;
  • The actions of the center, if its spectrum of purpose is total, will have an inherent tendency to reduce the total complexity of the environment to make it more compatible with the capacities of the center (to narrow the wide ends of the bow-tie down to the width of the center);
  • The less complex the environment is, (or the narrower the ends of the bow-tie,) the less complex (narrower) the center may become while preserving the same level of viability with respect to its environment.

Another concept from the theory of control systems, the law of requisite variety, has an important implication: Since the variety of perturbations a system can potentially be confronted with by its environment is unforeseeable and large, (typically due to combinatorial growth of possibilities with system size,) the system should always try to maximize its internal variety (or diversity), so as to maximize its chances of being prepared to benefit from any foreseeable or unforeseeable contigency. (Closely related to Taleb’s antifragility concept.)

Combining this with the previous observations, we can reach much farther. The more the center of the bow-tie with total spectrum of purpose consolidates itself and grows homogeneous, eliminating its internal diversity, the more it must rely on passively buffering itself from its immediate environment by mutilating away its environment’s complexity instead of engaging with it, and the more fragile and less viable it becomes. In turn, the more the center succeeds in mutilating away the environment’s complexity, the more room it has to consolidate itself despite the greater homogeneity consolidation imposes. This dynamic is a positive feedback loop of complexity reduction, the net effect of which is that the broader system in which the control system is embedded loses diversity on the whole, due to the globally homogenizing influence of the center’s attempts to retain control while simultaneously exploiting that control through greater consolidation, and the more fragile and less viable the broader system becomes with respect to external perturbations.

However, when growth of possibilities with system size is uniform and faster than linear, (which is quite true in the case of combinatorial growth,) there is another interesting consequence: the more consolidated the center becomes, the smaller is the size of the environment it can successfully control. So the center is increasingly the center of a narrower and narrower portion of its overall environment, while that portion grows more and more sensitive to perturbations from a growing exterior.

The application of these ideas to the case of the economy is straightforward. Consider Kevin Carson’s recent independent characterization of the historical trajectory of capitalism in this light:

Throughout history, propertied classes have relied primarily on artificial scarcities of material resources to extract a surplus from labor.  With the help of state-enforced artificial property rights, a ruling class can control great concentrations of land and capital. These monopolies prevent competition from driving down the price of capital and land to their natural values. Thus the means of production are artificially scarce and expensive, and labor is forced to pay tribute for access to them.

Today, however, the imploding cost of production means that concentrated ownership of land and capital is becoming less and less effective as a means of rent extraction. The desktop revolution has reduced the cost of setting up a “publishing house” or “music studio” a hundredfold. Micromanufacturing with open source desktop CNC tools will soon do likewise to the cost of a factory. Intensive raised-bed horticulture grows many times more food per acre than mechanized agribusiness. In fact most “farming” is a real estate investment in which the government pays rent for the “farmer” to hold land out of use!

In this age of abundance, when the falling cost of machinery and exploding efficiencies of extracting value from inputs threaten to make control of physical resources worthless as a source of rent, rents accrue mainly to “property rights” like the right to do certain things, or criminalizing competition from more efficient ways of doing things.

Under old-style capitalism, rents were extracted by using artificial property rights to restrict access to physical opportunities for production. Now that the cheapening of physical means of production has made this strategy untenable, the ruling classes must instead charge rents on the right to produce with one’s own physical resources.

Now, what is the way around this self-destructive dynamic? Referring to the bow-tie diagram, we see that a control system with a limited spectrum of purpose and tacit ways of engaging with the environment will be able to deal with inputs in a focused way that doesn’t put stress on its internal capacity for complexity, and will be able to further its purposes through actions that influence the environment by engaging with its complexity rather than violently mutilating the environment and destroying its complexity. Totality of purpose implies an inherently self-destructive dynamic, which casts doubt on the usefulness of such a sweeping ontological category as an economy as a focus for system design, and gives a new perspective on the troubles faced by totalitarian political systems and the tragedies that surround them. Also, smaller control systems interacting with smaller portions of the environment will face less uncertainty in establishing a balance between their internal complexity and their environments’ complexity, due to the rapid growth of complexity with size. The observation that “the most severe fragilities created by bow-tie architectures involve hijacking or manipulating the universally used central protocol and carriers, rather than simple destruction,” made by Marie Csete and John Doyle in their 2004 paper entitled “Bow ties, metabolism, and disease” indicates multiple smaller, simpler systems over fewer, larger, more complex ones to reduce vulnerability to adversarial attacks and worst-case vulnerability to chance failures. And so do the successes of systems designed as collections of individually minimalist, loosely-coupled parts, for example those based on the Unix philosophy, which speak strongly in favor of a society based on principles analogous to Eric Raymond’s design rules for software systems. Let me call your attention to these three:

  • Rule of Robustness: Robustness is the child of transparency and simplicity.
  • Rule of Diversity: Distrust all claims for “one true way”.
  • Rule of Extensibility: Design for the future, because it will be here sooner than you think.

Video of John Robb’s Open Source Venture Talk

Thanks to Andrew Hasse of East Bay Films, we now have a video of John Robb’s talk from March. We had a lot of interesting discussion during the long question-and-answer period at the end of the talk that you shouldn’t miss.

Work continues on his Open Source Venture project at

The Bitcoin Bubble

I recently read former BACE speaker John Robb’s thoughts on the emerging bubble in Bitcoins. He wrote the following:

As a store of value or an asset it’s shady.  Here’s why:  since the supply of bitcoin is limited and knowledge/use of it is growing (potentially virally) it’s the perfect breeding ground for a speculative bubble.  In a world awash with scams and financial speculation (a defining characteristic of our time), it was only a matter of time before the pump and dump mobsters moved in.  Spamming message boards everywhere.  Generating buzz.  Taking speculative positions.  The rapid rise in bitcoin’s value relative to the dollar can be seen below (on thin trading) demonstrates that this is already going on:

Bitcoin Trading History

…As far as I know this could become the first P2P bubble.

I want to share my own thoughts on why there are clear signs of a bubble forming in Bitcoins, and I think it goes far beyond the his view that “the supply of bitcoin is limited and knowledge/use of it is growing (potentially virally).”

The aspect of Bitcoins that is the most concerning to me regarding their tendency to be a vehicle for a bubble is that Bitcoins are backed by nothing; they have no value in themselves and do not represent a promise to deliver, do, or refrain from doing anything. Even gold, whose value many attribute to its relative scarcity and stable supply, has uses in chemical and electronic technology and a prominent place in the marriage traditions of India and in jewelry craft worldwide, all of which underpin its value and mitigate risk in dealing in it. And even national fiat currencies, while some criticize them because they are not redeemable for anything like the gold their predecessors were, have value that is in some sense intrinsic because they must be used to pay taxes and as legal tender they can be used to settle court-adjudicated debts. This is to say nothing of the petrodollar arrangement by which US dollars, commonly held to be a fiat currency, can be seen as being backed in a sense by an extremely important energy commodity.

In the analysis of stock prices and stock market bubbles there is an attempt to distinguish between the fundamental or intrinsic value of a company, which is due to its assets, profitability, and success and prospects in business, and its speculative value, which is due to market perceptions of what the market price of the company’s stock will be in the future. In the sense of this distinction, Bitcoins have only speculative value: the only tie they have to the broader economy is a price determined by their market’s perceptions of what that price will be in the future. They themselves are useful for nothing and are not directly redeemable for anything at all, useful or not.

In models of bubbles such as one in Didier Sornette‘s Why Stock Markets Crash, the intrinsic value of an asset is a baseline around which the speculative price deviates, and a kind of constraint on the speculative price’s deviations, in that some proportion of people in a market can be expected to make investment decisions based on estimates of intrinsic value, while others, with more appetite for risk or gamesmanship, will be willing to make speculative investment decisions, and their interplay determines the final price. My passing familiarity with such models, my familiarity with the history of cases where the tax collection systems, courts, and national reputations that stand behind national fiat currencies’ values have broken down, and my gut feeling on the matter all lead me to believe that an asset whose value is purely speculative, such as the Bitcoin, will have an especially brief and volatile existence before its value crashes. And already 30% to 50% swings in value in a single day have been seen for Bitcoins.

Another troublesome aspect of Bitcoins is that the number in circulation grows, by design, in such a way that the rate of growth slows to a negligible one over a period of two decades or so, with most of the growth occurring, or rather having occurred, in the first few years. (Bitcoins were devised in 2008.) Meanwhile, every other general measure of economic growth in the broader economy is conventionally considered to be exponential in the short term, and long-term data on economic growth of nearly everything resembles a power-law with log-periodic oscillations, and in either case the economy is shown to grow at a rate that either remains constant or increases in time. This assures a growing mismatch between the number of Bitcoins in existence and the general economic value that they would have to reliably measure as a stable currency, and one that will favor early participants in the market more and more in time until the eventual collapse, when those who fail to exit in time, often late entrants waiting for a significant return, are left having paid for a worthless asset (the same pattern of enrichment and impoverishment seen in a pyramid scheme).

This leads me to mention the third troublesome aspect of Bitcoins is that most of the coins created through ‘mining’ of them will be in the hands of early enthusiasts of the system. They thus constitute an insider group with a large incentive to hype the value of Bitcoins to the rest of the world and dump them on whichever greater fools they are able to find or create. We are now witnessing the first broad effort to hype the value of Bitcoins, with the predictable results. Sadly, the final stage of this trajectory is a dramatic collapse, and due to their lack of intrinsic value to stabilize them as an asset I expect the ride to be especially bumpy and brief in the case of Bitcoins.

According to various rubrics, such as Bernard Lietaer‘s here, four key roles that a currency might serve are measure of value, medium of exchange, store of value, and tool for speculative profit, where to be useful as a currency the first two are indispensable, and the last two undermine the second, and speculation undermines both of the first two. Let’s see how Bitcoins look in terms of this rubric:

  • Measure of value: Bitcoin prices are set by a purely speculative market where variations in a single day are routinely a significant percentage of Bitcoin total value, making them very poor choices for measuring anything’s value: during the time between you ordering something online and the seller shipping it to you, the price in Bitcoins can easily change by half, to say nothing of doing something like making a contract for long-term business (say over a span of years) in Bitcoins. In keeping with the general behavior of bubbles, this volatility should worsen as time goes on and the bubble nears its collapse. Bitcoins fail as a measure of value.
  • Medium of exchange: Bitcoins’ only connection to the rest of the economy is through an extremely volatile speculative market for them. They are not currently broadly accepted as payment despite a certain notorious example, the Silk Road (semi)-anonymous marketplace. They lack any kind of backing, credible or otherwise, in something of broadly accepted value, such as a commodity, by which currencies throughout history typically earn trust as a medium of exchange. Their strong deflationary tendencies will mean that people holding them will much prefer holding them to spending them. Bitcoins fail as a medium of exchange.
  • Store of value: Bitcoin prices are extremely volatile and all signs point to their following a severe example of a bubble trajectory ending in a dramatic collapse, with no intrinsic value to put a floor under that collapse. Bitcoins fail as a store of value.
  • Tool for speculative profit: I personally think that I could not have engineered a better tool for speculative profit had I been trying for the last ten years. No backing to slow the bubble dynamics down or hinder rapid growth of the system, the pretense of which is behind even the shadiest penny stock pump-and-dump or largest dubious IPO. Enough cryptographic and algorithmic sophistication to the system to give it geek chic and an appearance of integrity and far-sighted design, but not so much that strong anonymity, or anything dispensable to the purpose of running a speculative market, is a feature. A free-money feeling to the activity of mining that has created a group of early adopters who are now carrying everything to its conclusion by acting to get that free money in the form of actual money. And growth is rigged so that those closest to the system at the beginning get the richest. Bingo.

In brief, Bitcoins are a fascinating economic experiment whose conclusion I look forward to eagerly and with great interest. But as far as I can tell, Bitcoins seem much more like a refinement of some of the most systemically dangerous things in the economic system that led to the collapse and the still-dragging-on depression than something likely to challenge such things or provide a meaningful alternative to them.

Food Markets and the Interesting Case of Fontaines-en-Sologne

I came across the anthology Do Economists Make Markets? On the Performativity of Economics edited by Donald MacKenzie, Fabian Muniesa, and Lucia Siu which takes on the question of what kinds of feedback loops, if any, exist between economics and what economics studies, a question of great relevance to our era where economic theory and practice influence one another in deep and complex ways. A sentiment in the introduction struck me: “No language is simply a mirror of what it sets out to articulate, but neither should languages be reduced to the social interests of those deploying them,” and another, “Economic rationality is not like Newton’s laws, which are supposed to be at work everywhere in the universe. It is a fragile property that must be carefully preserved by creating a hospitable environment.” Both do a good job of giving form to the ghosts that haunt me when I think about currencies and how they should be designed and built.

It also happened that the case studied in depth in the second chapter of the book is one of a regional food auction organized in Fontaines-en-Sologne, France in the 1980s which seems relevant to the briskly developing urban and local farming activities in the bay area and is especially interesting to me due to the appeal of the idea of backing a local currency with shares in a local food market. The region was one of the poorest in France and considered little more than a swamp and game preserve but after organizing a regional strawberry auction made a name for itself as a premium producer of branded and quality-assured strawberries, and this provided an economic boost to many types of farmers who weren’t previously doing very well. The construction of the auction was, in the way the auction operated, very strictly in accordance with the economic theory of auctions: a great deal of effort went into grading strawberry quality objectively and structuring the flow of information about quality, bids, supply, demand, and prices in the way auction theory demanded. On the other hand, side information still flowed through external channels beyond the reach of the designer of the auction and politics among strawberry producers and between producers, shippers, and the retail market were a decisive factor in its success and determined the ultimate form it took and how it related with the rest of the economy.

A key passage:

“The construction of the auction market formed groups, crystallized identities. The antagonism of opposing producers and shippers that I described earlier was still alive. But my new observations pointed out the emergence of a more solidarity-oriented attitude. Shippers were recognizing that the Fontaines-en-Sologne’s auction system—combined with the quality labeling of strawberries—allowed producers to exist as such. Producers who engaged in the early crusade for market transparency—that is, for a furthering of competition among shippers—were reluctant to enter into trade directly with mass retailers’ central buying offices. Without a “reference price,” they would find themselves ill-equipped for a defense of their interest in the market. They also though that new market arrangements would be too demanding in terms of logistics for a product with a short growing season. Besides that, a transformation of market practices would challenge the economic disposition that they acquired with the auction market—the stimulation of production through systematic monitoring and comparison of prices.

Market managers were trying to defend shippers, for instance, asking central buying offices not to bypass shippers. When they published advertisements about the market, they added contact details of the shippers who were acknowledged members of the market. When clients got in touch directly with the Fontaines-en-Sologne market, managers redirected them to the members—“we have known our shippers for a long time,” a manager said.

However, solidarity was somewhat less pronounced in the case of younger generations, confronted with other logics of social reproduction. Producers’ new family arrangements could prevent the producer from leaving his or her farm during auction days, because no other family member was available to replace him or her. Shippers who were not dependent on traditional circuits and who were engaged in business with mass retailers were also somewhat disconnected from a defense of the auction system. The identity of the “strawberry from Sologne” started to be questioned, as its quality was based more on a competitive tension than on a standardized assessment. Recently, and as a response to an audit process in 1999, market managers decided to rebrand Sologne strawberries. The fraises du cadran de Sologne have become the new Mian-Mian Sologne strawberries. Besides the fact that this new brand name may not raise much enthusiasm, it is noticeable that the word “cadran,” that is, the auction identity, is no longer part of the identity of Sologne’s strawberries, at least not as they are now marketed.

In short, the Fontaines-en-Sologne’s auction market was threatened less by the shippers’ collusive strategies against the producers’ move of fostering competition than by the transformation of commercial networks, the rise of agrofood mass retail, and their economic justifications. Competition between commercial networks seems to be playing a crucial role in legitimating certain market institutions and delegitimating others. The logic of market relations cannot be grasped only through the logic of market interactions. At the origin of markets there are never rootless and detached individuals. the History embodied in the different actors that intervene in the construction of a market and the history materialized in the preexisting circuits of exchange delineate the space of constraint of any new social construction.”

The English translation is the second chapter of this book and the pdf is available here in Portuguese.