Bitcoin and the economy
The first cryptocurrency appeared in 2009, and it was fundamentally different from all other forms of monetary transactions.. The Bitcoin network was mainly distinguished by the fact that it was decentralized, and there were no states, central banks or other similar structures behind the issue of coins.. The very idea that money could exist exclusively in electronic form, as well as the idea that the state is not always needed to issue it, seemed absurd to many.
But, years later, investors are actively using cryptocurrency to build investment portfolios, and Bitcoin for “deflationary” purposes instead of inflation-prone fiat currency. And BTC is used in this way not just by some “strange enthusiasts,” but by large companies with a capitalization of billions of dollars, like Tesla or MicroStrategy.
Austrian School of Economics
The founder of the AES is considered to be Carl Menger (1840-1921), who wrote in one of his works:
“Money is not an invention of the state. This is not a product of legislation. Their existence does not even require the permission of political power. Some goods became money quite naturally simply as a result of economic relations independent of state power.”
What Menger said is true for Bitcoin as well.. After Menger, there were other outstanding economists of the Austrian School: Ludwig von Mises, Nobel Prize winner in economics Friedrich August von Hayek, the founder of anarcho-capitalism Murray Rothbard and many others.
Economic schools
A school of economic thought is a body of ideas about how the economy actually works. There are many of these ideas, held by a certain group of economists, and they are often intertwined with methods and approaches from other areas. But in general terms, the following directions can be named: classical theory, marginalism, monetarism and Keynesianism.
Classical theory is about economic liberalism as represented by Adam Smith, David Ricardo and some other “classics”. It is considered classical because most subsequent systems in economic theory were in one way or another within the scope of the classical school. Marginalism is about marginal values, an equilibrium market system and subjectivism. Here you can remember Carl Menger or Leon Walras. Therefore, it was marginalism that received its development within the framework of the Austrian economic school.
The main theses of the AES can be summarized as follows: prices on the market are formed self-organized, human activity is the activity of each person individually, economic relations are a complex and changeable phenomenon, and attempts to regulate the economy centrally through the state will not lead to anything good, which is why decentralization is needed. Competition in the market is a blessing and an engine for economic growth.
Libertarianism and anarchy
It is AES that underlies an entire philosophical movement called libertarianism, the ideas of which boil down to the following:
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A person belongs to himself, not to others.
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Aggressive violence is when a person's self-belonging is actively denied. Therefore, libertarianism has a principle prohibiting aggressive violence.
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If some people commit violence against others, this is a manifestation of inequality in freedom. A person can defend himself against aggressive violence.
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People can make free exchanges among themselves, conduct transactions, sell goods and services without aggressive violence.
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The state, from the point of view of libertarianism, always or almost always intervenes forcefully in relations between people.
Monopolies and antitrust
From the AES point of view, monopolies do not arise on their own in a free market, contrary to common myths and misconceptions. On the contrary, any monopoly is a consequence of government intervention in free market relations. But how can the state create a monopoly or at least an oligopoly? This usually happens through publicly authoritative coercion. The state may impose licenses and certificates required to engage in certain activities, thereby limiting the entry of many participants into the market.
The state can also introduce a direct ban on certain activities and declare itself the only legal service provider on the market. This idea can be traced both among well-known representatives of the AES (Murray Rothbard, Friedrich Hayek) and among individual researchers of antitrust legislation (Dominic Armentano).
If you think that this is some kind of “marginal” point of view in economics, and AES is the only school that thinks so, then it is not so. The founder of monetarism and Nobel Prize laureate in economics, Milton Friedman, was also convinced that monopoly is not a market phenomenon, but government intervention.
Based on the above theses, it becomes clear that for the AES, the modern monetary system is, in essence, a power monopoly of states on the production of what is commonly considered money. States print fiat currency, while prohibiting other market participants from producing their own money and using it in free circulation. Thus, the only supplier of this product is one centralized issuer – the state. In Rothbard's typology, the example of money and quasi-money (ration cards) is called the “absolute prohibition of production.”
Role of Bitcoin
What is the role of cryptocurrencies in this story? Bitcoin is an example of electronic cash that emerged in defiance of massive “absolute bans on the production” of private money.
Simply put, cryptocurrency is money that appeared without the participation of the state. They were created by individual enthusiasts or groups of enthusiasts, and those cryptocurrencies that were in demand on the market have today accumulated capitalization amounts amounting to billions of dollars. Thus, the capitalization of Bitcoin in February 2024 completely exceeded $1 trillion.
From the point of view of the Austrian economic school, cryptocurrencies are a unique example of “private money” that could effectively compete with state currency.
The idea of creating cryptocurrencies belongs to the early cypherpunks – people who, to one degree or another, share the ideas of libertarianism, maintaining online anonymity, eliminating centralized control systems, and those who were against excessive government interference in the private lives of individual people.
Bitcoin emerged as a relatively anonymous way of making monetary exchanges, while it was not controlled by the state and was decentralized. That is why there are so many ideological supporters of libertarianism and AES among cryptocurrency supporters. In a broad sense, cryptocurrency is a consequence of the ideas of the Austrian School of Economics.
The role of Satoshi Nakamoto
Although the anonymous creator of Bitcoin, Satoshi Nakamoto, presented the world with a technical description of his project without direct references to AES and the fundamental economic ideas that formed its basis, something indirectly suggests that the developer shared these ideas. We are talking about a message in the genesis block – the first block of the Bitcoin blockchain.. In its hash value you can find text referencing The Times headline: “Chancellor on brink of second bailout for banks.”
Nakamoto was probably hinting at the fact that traditional financial institutions and large banks are not able to effectively cope with their tasks and require huge expenditures from the government. Bitcoin, even at the time of the launch of the genesis block, was a way to solve these economic problems.
Friedman's prediction
We have already talked above about Milton Friedman, a representative of the monetarism movement of the Chicago School of Economics. Interestingly, in an interview in 1999, the economist actually predicted the emergence of cryptocurrencies. He pointed out that the development of the Internet will contribute to reducing the role of governments. Friedman also added that an electronic money system will soon appear, in which it will be possible to transfer digital cash from A to B without leaving any “traces.”
Conclusion
Bitcoin directly correlates with the ideas of the Austrian School of Economics and libertarianism. Cryptocurrencies are based on decentralization, competition, free trade exchanges, and an inherent lack of regulatory pressure from governments.