December 22, 2013
The NYT gave readers an excellent example of how the financial sector can lead to an enormous waste of economic resources. It reported on a massive set of sophisticated computers in Iceland that is devoted to the sole purpose of “mining” bitcoins. The point is that these computers are used to carry through complex algorithms more quickly than competitors in order to lay claim to new bitcoins as they become available on the markets.
While this can be quite profitable to an individual or firm that successfully claims a substantial portion of the newly created bit coins, it provides nothing of value to the economy as a whole. It is a case of pure rent-seeking, where large amount of resources are devoted to pulling away wealth that is created in other sectors. This is the story of much of the activity in the financial sector, such as high-frequency trading or the tax gaming that is the specialty of the private equity industry, but in few cases is the rent-seeking so clear and unambiguous. The NYT did a valuable service by presenting this example.
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