Commodity Resource Costs

From Marginal Revolution

One of the problems with commodity based currencies (hard or virtual) is that it diverts activity from productive activities. It used to happen with gold, where firms would focus on mining due to gold’s currency value and not on real supply and demand dynamics that mostly resembles today’s mining environment. And now it’s happening with Bitcoin, where instead of focusing on productive things like software, some engineers are focused on Bitcoin mining.

In reality, this isn’t the biggest problem. A major problem is the arbitrary inflation and deflation that comes through changes in supply (or lack thereof) and the market value of these commodities. We would have already experienced aggressive bouts of inflation and deflation with Bitcoin (as historically happened with gold). Not to mention that it helps make a financial crisis a full scale depression (here and here)

As Milton Friedman stated, commodity standards are justifiable for those favoring limited government but in practice have quite a bit of negative consequences that gives fiat currencies the advantage.

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One thought on “Commodity Resource Costs

  1. David Schwartz

    Bitcoin mining secures the Bitcoin block chain which makes Bitcoin transactions possible. Your argument only works if you consider securing the Bitcoin system not to be a “productive activity”. You are welcome, of course, to believe that, but you should state that this is one of your assumptions/beliefs,without which your argument does not work.

    But then all you’re arguing is that if Bitcoin is useless/worthless, then all the effort put into it is wasted. I think everyone would agree with that.

    Reply

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