“the beliefs of many economists”

In an otherwise good article about Bitcoin -- http://www.irishtimes.com/newspaper/finance/2011/1007/1224305381674.html -- +Danny O'Brien wrote: “Its built-in deflationary characteristics may, in the belief of many economists, rule it out as a currency for its foreseeable life.”

Here is an excerpt from a letter that I wrote to him last night (Danny is someone that I know and like personally):

Citation needed! I'm aware of exactly two economists who have commented on Bitcoin's money supply: Paul Krugman, who said that the dearth of trade in goods for Bitcoin was evidence of the problems with a deflationary currency [1], and Russ Roberts, who said that predictable deflation may not be harmful the way the unpredictable deflations of the past have been [2].

"That is considered very destructive in today's economies, mostly because when it occurs, it is unexpected," said Roberts, "In a Bitcoin world, everyone would anticipate that, and they know what they got paid would buy more then than it would now."

There is also one economist who has commented on Bitcoin without directly addressing the money supply issue: Larry H. White [4], who mentioned Bitcoin in a positive light while speaking before a House of Representatives subcommittee (video [5], transcript [6]).

Then there is one person who is "almost an economist" who has commented on the issue of Bitcoin's money supply. Jerry Brito is a
bona fide researcher who sometimes blogs about economics and who works at an economics think tank, but his degree, university department, and all of his scholarly publications are in law rather than economics. His comment on Bitcoin's money supply was that it is immune to the threat of excess inflation [3].

Tyler Cowen is a bona fide economist, but his comment on Bitcoin [7] was so confused (and self-confessedly so!) that I can't tell whether he was saying anything about its money supply or not. I suspect he didn't understand it well enough, when he wrote that comment, to even know what its money supply properties were.

In sum: there is a widespread belief among people (liberals, specifically) that I follow on twitter. This belief is that there is a consensus among real economists that Bitcoin is inherently a terrible idea because it is deflationary, which is a critical flaw. I haven't found evidence for this belief. As far as I can tell there are only two or three economists who even have an inkling of what Bitcoin is, and among those two or three, the majority appear to think that its money supply is not obviously catastrophically wrong.

I suspect the belief stems from thinking that (a) economists agree that a fixed money supply, e.g. the gold standard, is fatally flawed due to the dangers of a deflationary spiral, and (b) that therefore economists would conclude that Bitcoin is fatally flawed. Aside from the question of whether there is truly a modern consensus among economists about (a), it is another step to go from (a) to (b)!

Krugman appears happy to take that step; Roberts is more careful. (This is a good example of what I really respect about Roberts's thinking.)

Krugman's comment is facile. Out of all possible explanations of what causes Bitcoin to have a low level of trade-for-goods, he chooses the explanation that fits his pre-existing interests: gold-standard-like fixed money supply! This is very unlikely to actually be a significant cause of the low level of trade for Bitcoin. New currencies almost always fail. If the failure (so far) of the fixed-money-supply Bitcoin is evidence of the dangers of a fixed money supply, then the failures of the variable-money-supply Beenz and Flooz are evidence of the dangers of a variable money supply, and the successes of e-gold and WebMoney are evidence of the safety of a fixed money supply. More likely the dynamicism of the money supply had nothing to do with the success or failure of any of those.

(Edit: don't miss +Tyler Close's point in the comments below that Bitcoin is currently actually highly inflationary, not deflationary.)

Danny wrote back to me and admitted that he was not aware of any economists other than Krugman who held that opinion about Bitcoin.

[1] http://krugman.blogs.nytimes.com/2011/09/07/golden-cyberfetters/
[2] http://www.technologyreview.com/computing/37619/page2/
[3] http://techland.time.com/2011/04/16/online-cash-bitcoin-could-challenge-governments/2/
[4] http://mason.gmu.edu/~lwhite11/
[5] http://www.freebanking.org/2011/09/13/the-free-competition-in-currency-act-of-2011/
[6] http://financialservices.house.gov/Calendar/EventSingle.aspx?EventID=258253
[7] http://marginalrevolution.com/marginalrevolution/2011/04/the-economics-of-bitcoin.html
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