Let’s do this! It’s time for another dose of Saifedean Ammous’ “The Bitcoin Standard.” Today we’re going to learn about the magical properties of “price.” A tool so ever-present that it’s easy to take it for granted. Yet, as we’re going to learn, society couldn’t organize without prices. This fact is both obvious and easy to miss. So, prepare to learn something that’s going to be useful for the rest of your life.
As Ammous puts it, prices are capitalism’s information system. And we’re all so accustomed and trained to use prices to navigate, that we don’t even notice them. Until today.
But first…
About The Coolest Book Club On Earth
The Bitcoinist Book Club has two different use cases:
1.- For the superstar-executive-investor on the run, we’ll summarize the must-read books for cryptocurrency enthusiasts. One by one. Chapter by chapter. We read them so you don’t have to, and give you just the meaty bits.
2.- For the meditative bookworm who’s here for the research, we’ll provide liner notes to accompany your reading. After our book club finishes with the book, you can always come back to refresh the concepts and find crucial quotes.
Everybody wins.
So far, we’ve covered:
- Prologue and Chapter 1
- Primitive Moneys (Chapter 2)
- Why Gold? (Chapter 3, Part 1)
- History (Chapter 3, Part 2)
- Gold Standard (Chapter 4, Part 1)
- Government Money (Chapter 4, Part 2)
- Money and Hyperinflation (Chapter 4, Part 3)
- Time Preference (Chapter 5, Part 1)
- Capital Accumulation (Chapter 5, Part 2)
And now, “Chapter 6, Part 1: Capitalism’s Information System“
The third property of money, “unit of account,” is the one bitcoin struggles the most with. As you might’ve noticed, bitcoin’s price is volatile. You could say that for that reason, bitcoin fails as a “unit of account.” However, the price is only volatile in comparison to fiat money. If bitcoin was the standard, it could provide “a fixed frame of reference with which to compare the value of different objects to one another.” So, it could definitely be a stable unit of account.
Now, speaking about price.
In a free market economic system, prices are knowledge, and the signals that communicate information. Each individual decision maker is only able to carry out her decisions by examining the prices of the goods involved, which carry in them the distillation of all market conditions and realities into one actionable variable for that individual. In turn, each individual’s decisions will in turn play a role in shaping the price. No central authority could ever internalize all the information that goes into forming a price or replace its function.
It could be said that “price” is the original DAO. A decentralized autonomous tool that absorbs information from everywhere and everyone. Prices are “the information system of economic production, communicating knowledge across the world and coordinating the complex processes of production.” They’re crucial. “Prices are the only mechanism that allows trade and specialization to occur in a market economy.”
Specialization itself, guided by price signals, will lead to producers further improving their efficiency in the production of these goods through learning by doing, and more importantly, accumulating capital specific to it.
Price Vs. Socialism
According to Ludvig von Mises, socialism’s single point of failure is that it doesn’t have prices. Without that guide, “socialism would fail at economic calculation, most crucially in the allocation of capital goods.”
The supply and demand of capital goods emerges from the interaction of the producers and consumers and their iterative decisions. In a socialist system, government owns and controls the means of production, making it at once the sole buyer and seller of all capital goods in the economy. That centralization stifles the functioning of an actual market, making sound decisions based on prices impossible.
If the government owns everything, there’s no market producing all the information that would be condensed in the prices. Without them, “there is no way to calculate how to allocate these resources to produce the optimal products.” Also, “Central planners can never know the preferences of each individual nor allocate resources in the way that satisfies that individual’s needs best.”
It’s also worth noting that:
A survey without prices would find that everyone would like their own Ferrari, but of course, when people have to pay, very few choose Ferraris.
That’s human nature, and so is this:
The ever-present human impulse to tinker, improve, and innovate gives socialism its most intractable problem. Even if the central planning system succeeded in managing a static economy, it is powerless to accommodate change or to allow entrepreneurship.
Now, if prices carry that much information and are that important, what do “price control” policies do? We’ll talk about that in our book club’s next meeting.
BTC price chart on Bitstamp | Source: BTC/USD on TradingView.com