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Home Publications Blogs Beat the Press Paul Krugman Was Right About Bitcoin and I Said It First

Paul Krugman Was Right About Bitcoin and I Said It First

Tuesday, 24 December 2013 08:24

Timothy Lee says that Paul Krugman got it wrong about the resources being wasted in the process of bitcoin mining. Krugman wrote a column based on a NYT piece about a massive bank of computers located in Iceland (low cost electricity) that is devoted to developing complex algorithms that allow the owners to get a large share of newly minted bitcoins.

Lee's complaint against Krugman is that this mining is actually part of the Bitcoin transactions process. The correct answer to Lee is, so what?

Suppose that some of the people engaged in gold mining are actually armed guards who are there to protect any gold that is recovered. Would these mean that the labor of the armed guards is not being wasted in this totally unproductive exercise? The same applies to the banks of computers calculating algorithms. It doesn't change anything if they are part of the processing network.

Of course when we have governments that are determined to waste resources by running budgets that leave tens of millions unemployed, even nonsense like Bitcoin mining can be a positive, as Keynes noted. But Krugman is 100 percent right, bitcoin mining is an incredible waste of potentially productive resources, and I said it first.

Comments (13)Add Comment
written by JSeydl, December 24, 2013 7:59
The Bitcoin mining process sounds wasteful. However, I wouldn't entirely dismiss the move to paperless currency. The reason is because with paperless currency, it's more likely that the zero lower bound won't constrain monetary policy -- it's much easier to tax paperless currency to get people to spend more than tax paper currency, whose holdings are mostly anonymous. You do have a problem of freedom here, in that a fullsale move to paperless currency will no longer allow people to transact anonymously -- even though Bitcoin claims to promote anonymous transactions, there is always a papertrail on the Internet. So the freedom infringement would need to be weighed against the demand-promoting benefits of paperless currency; but I don't see why that calculus couldn't make sense, especially in our current economic climate.
A clue
written by Ecomedian, December 24, 2013 8:53
Apparently you are unaware of the transaction fees that banks charge like 3% on credit card transactions. Bitcoin transaction verification is a bargain compared to the rent that the financial services industry currently charges.
Bring Back the Mafia ... in the Name of Transaction Efficiency
written by Last Mover, December 24, 2013 9:07
... this mining is actually part of the Bitcoin transactions process.

Exactly. So according to the theory that the more difficult the transactions the more jobs created, then entities like Microsoft deserve an award for creating the most jobs ...

... by requiring users to spend billions of wasted hours on bloated Windows OS software made intentionally mind numbingly complex by virtue of its monopoly power and the incentive to maintain it over competitive alternatives.

This is what true libertarians mean when they say anything the private sector can do is by definition, superior to whatever the government could do directly or indirectly through regulation. Specifically, the "inefficiency" of rent-seeking is actually deemed efficient when compared to government, because the jobs created are still considered superior.

This comes close to claiming for example, that the Mafia provided better security and insurance for private business to function than the government could merely by virtue of being private. Indeed, Mussolini did keep those trains running on time didn't he.

As for the fake libertarians, meaning practically the rest of the GOP who actuallly worship government power, they are just flat out lying, denying that transaction inefficiencies exist in the likes of Bitcoin and Microsoft, in the name of lol "free market competition".
written by bobs, December 24, 2013 10:22
oops... I posted this comment in the wrong place. Sorry for double-posting.


Right up there with the billion-dollar trans-atlantic cable built to save 5 milliseconds in high-speed trading...

The difference bitcoin and gold mining is that (1) gold has intrinsic value -- it's durable and pretty -- (2) it must be mined. But there is no rhyme or reason why bitcoins should be mined. The stated purpose is to order transactions but there are many simpler ways to do that. The *real* reason has to be something else: keeping bitcoin value high while sucking in people, for example.

But if you insist on mining, then for crying out loud, make it useful. You could build a hash function out of a protein folding program. This way you'd be solving protein structure along the way and do your bit(coin) for humanity...
The waste is obvious
written by jonny bakho, December 24, 2013 10:37
The opportunity for rent seeking comes in part for government restrictions on "illegal" activity. Bitcoin provides a service to avoid government interference.

Beyond that service all else is rent seeking.
written by Jesse, December 24, 2013 10:52
All financial transactions require overhead, and the bitcoin activity is no different, not any more wasteful, and significantly less expensive than the bloated, outsized financial sector that straddles the real economy today. Has Krugman ever visited the computer rooms for the credit card companies or for Wall St? Is he aware of the building of microwave tower links between Chicago and NY to shave a few microseconds off the latency to allow some algos to game the markets?

I see quite a few weaknesses in bitcoin, but 'wastefulness' of one type of electronic money vs. another is hardly the best one. Krugman said several odd things in that piece.

I could not help but wonder what triggered such a thinly reasoned polemic. Is the great currency reset that close at hand?

written by skeptonomist, December 24, 2013 11:15
What anti-fiat people presumably want (or should want?) is a money supply that grows gradually along with productive capability. Mining gold and now "mining" bitcoins can do this rather crudely. If we had some omnipotent computer algorithm that would do this automatically - without using a lot of computers and electricity - that might satisfy a lot of people with divergent ideologies. Remember that Milton Friedman suggested that this should be the objective of central banks. However, the Fed strove mightily to control the growth of the the money supply and inflation in the 70's and failed abjectly. Currently the Fed has been striving mightily to increase the money which is actually used for investment and employment and is again failing. The process of creating money through banks is evidently not well enough understood by economists to allow central banks to actually regulate the money supply. Now it seems that creating money through banks is to be supplanted by creating it through drug dealers. This would be different, but not necessarily better.
written by Gigi, December 24, 2013 12:25
True, bitcoin is resource intensive.

But do you belive that VISA or the stock markets are not?

Here is an article about VISA data center, much more impressive and expensive that the bitcoin mine from the article.

written by watermelonpunch, December 24, 2013 1:03

Does anyone think the term - bitcoin mining - is going to go down in history as daftly silly?
Careful Dean, the virtual gold bugs abound!
written by Matt, December 24, 2013 7:28
And they get very angry when someone points out the absurdity of their schemes!

It's not that virtual or crypto-currency is necessarily a bad idea (especially if it reduces transaction costs). It's that this particular implementation is terribly wasteful. Most altcoins, including the popular ones, share a resource hogging design that guarantees super-computers that could be used for productive purposes are instead making strings of digits to satisfy techno-libertarian egos.
Comparisons between bitcoin and financial networks.
written by Jon, December 26, 2013 1:26
It is not reasonable to compare the bitcoin transaction costs with those of visa or mastercard. Credit Card's perform additional functions beyond the actual transaction. Credit cards double as a way of borrowing money; a straightforward bitcoin transactions does not. Companies in the credit card system also pay rebates to customers, resolve billing problems, deal with fraud, provide customers with statements, and incur a host of other costs that are not covered by bitcoin miners, but would also be associated with wide scale bitcoin adoption. Furthermore, Visa and Mastercard transaction volumes dwarf Bitcoin's.

Finally, it should be pointed out that the dollar and other currencies are both electronic and "paper".
Spacy Krugman and Waste
written by cas127, December 26, 2013 11:15
Hmmm...How to reconcile K's distaste for non-Keynesian sanctioned "waste" and his Space Invader stimulus of a few years back...

Viewed from outside DC, it looks like the *real* bottom line is just *who* gets the kickbacks from pointless/corrupt pyramid building in the name of nebulous "potential GDP" - of course DC wants its snout in that trough.
Myriad Development of Bitcoin Platform CryptoCafe.com
written by Kashfiya Rafa, December 28, 2013 11:32
CryptoCafe is going to be big in the world of Bitcoin, be sure to sign up for the big release announcement. The website is owned by a public company called Myriad Interactive, the stock symbol is MYRY and its predicted to be very big!

Myriad Interactive Media Begins Development of Bitcoin Platform CryptoCafe.com

For more information and to read disclaimers and disclosures: http://finance.yahoo.com/q?s=myry

Happy Trading :)

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.