posted ago by defiant_liberty ago by defiant_liberty +5 / -0

Peter Schiff's dad wrote a book "How an Economy Grows, and Why it Crashes". It is a great and insightful book, and teaches a lot about economics. However, while the economic principles are sound, there is one part where I think there is a tiny flaw. In the book, Albe lends Charlie some fish, and expects to be paid back with twice as many fish as interest. It is a good example, but in the real world things never work that way among small groups of people. In small groups of friends, people keep track in their head. For example, if your GF does the laundry and dishes, she doesn't itemize it and send you a bill to deduct from your pay. Instead it's a give and take, she is responsible for some things, you for others. If you notice that she is stops trying, then at some point you will likely decide to act and try to change the situation.

Another example might be you come to my home one day and have dinner at my expense, than I come to yours another day and have dinner at your expense. We may switch back and forth every few days, and as we do it acts like an economic trade. We could choose to stop at any time, but we don't because like all trade it is mutually beneficial. Maybe I took a risk when I served up the first free dinner, but in truth I was keeping track subconsciously. If you told me to fuck off about dinner at your place, I would never give you a complementary dinner again.

As these economic transactions become more complicated, and maybe new friends come to the table, we may agree to ways to keep track more easily. Like, everybody gives a wooden token to whomever cooks up dinner for them, and then those tokens can be used next time to get dinner from somebody else. As long as we all trust one another, this works fine, we could engage in trade forever, and all would be well.

The problem is, once the group becomes too large, it is just too easy for a person to make up a fake wood token and cheat. There is not an easy way to solve this problem. You can have a trusted person in the community keep track on some kind of a ledger, but this often creates too much temptation for corruption. The only other way is for the token itself to have the real value. If a person gives me gold, I have no need to be concerned about fraud. The gold itself has the value, and can be exchanged for value from somebody else at any time. The gold is money.

Notice, as long as we had trust, we were perfectly capable of engaging in business and commerce without gold money, but when we can't trust, gold itself acts to fill in that trust.

Well, the thing is that crypto currencies solve the trust problem. If a person gives me a crypto coin, I can trust that he just didn't create some bullshit promissory note out of thin air, or maybe he did, and I'm giving him the first freebie for tokens as the benefit of the doubt, just like with that first free dinner. Either way, it's worth the risk because the benefit of mutual and fair trade outweighs the risk of being ripped off, especially for tokens that are in common use. Maybe these tokens will fluctuate in price, but like any market, they will find a floor value and a max value, and from there I can calculate the risks and values of transactions.

So technically speaking Peter Schiff is right, the crypto coins have no value and are not money, just like the initial wooden tokens traded among friends to keep track of the dinners. But in practice they aid greatly in tracking and trade and transactions, and using coins for goods and services is as much a social activity as an economic activity. Just like that small group of trusted friends didn't need gold and commodity money to engage in effective trade and economic activity between them, crypto currencies can be useful even if they have no commodity value.