Bitcoin and the Tyranny of Time Scarcity (Part 2)
Economics is the art of cooperation and competition aimed at conquering scarcity.
Trade Interconnects Us
Acts of trade (or interpersonal exchange) interconnect us into economic networks which increase our productivity by virtue of our inherent comparative advantages: a diversity of skills, experience, and know-how that arises naturally among us. Trade allows us to focus on our comparative advantages and become ever-more specialized in our skills over time. This positive-sum game undergirds all economic activity; by working as a cooperative ensemble we become more productive than we would be working as isolated individuals. Our economic interdependence makes us collectively more productive and prosperous. This cooperative dynamic is commonly called the “division of labor” and the general purpose of society is to foster an environment which favors its proliferation.
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The division of labor enables each of us to concentrate on what we do best and increases our collective productivity: meaning it lets us produce the same amount in less time or a greater amount in the same time. Alternatively, we can choose to use these newfound time savings to innovate. Innovation involves the creation of tools and technologies to help us do even more in less time (i.e. digging with a shovel instead of by hand). As innovative new tools and ideas become diffused into society through trade, more time savings are generated, and this process becomes recursive into a self-reinforcing, virtuous cycle with no known natural limit:
By specializing, trading, and innovating societies create a (literal) wealth of time savings that can be spent productively or leisurely. By spending time savings productively, societies create wealth — the accumulation of time saved in the form of capital. Anything that economizes human action — tools, knowledge, or even relationships — is considered capital, as it provides a way for us to more quickly satisfy our wants. Said simply, as we become more productive, we accumulate more capital — a form of frozen time savings. In this respect, we have come a long way over the past two centuries:
Money: Mankind’s Masterwork
Money is the most marketable (or readily exchangeable) capital in an economy; it is the most liquid measure of time savings — a social chronometer of sorts. Money is the technology we use to measure and move the value of our time savings across time and space. The primary function of money is to store value, meaning that it must (at a minimum) retain its own exchange value across time. Naturally, as our collective productivity increases, the value of money rises in tandem, and prices expressed in it decline. The secondary function of money is to mediate exchange, meaning that it can be exchanged for anything in the marketplace — goods, services, or knowledge. Money is sought by all seeking to trade their way into satisfying personal wants (this includes everyone that isn’t entirely self-sufficient). The tertiary function of money is to quantify exchange ratios, meaning it is used to denominate prices across the minds of market participants. Consider how we think in dollars, or in our local currency, when deciding whether and how much to buy or sell of anything in the marketplace. Interestingly, this “unit of account” function of money is so deeply etched into our mental machinery that it actually changes how we think and perceive the world.
Besides these three functions, monetary technologies generally exhibit the following traits:
Scarcity: resistance to money supply manipulations and, thus, dilutions to its monetary unit value (difficult to produce)
Divisibility: ease of accounting and transacting at various scales (separable and combinable units)
Portability: ease of moving value across space (high value to weight ratio)
Durability: ease of moving value across time (resilient to deterioration)
Recognizability: ease of identifying and verifying the monetary value by other parties in a transaction (universally identifiable and verifiable)
Whatever good is most impervious to the depredations of time, transference, and greed is naturally selected as “money”. The monetary technology selected freely in a marketplace is referred to as “hard money”; a haven for liquid value (exchangeable time savings) that resists the ravages of time, damages related to transference across space, and intentional misappropriations by those vicious two-legged apes (people). In these respects, monetary metals have been historically superior due to their durability and portability, making them ideal for storing value across time and space, respectively. With the advent of coinage, which standardized each monetary unit, the divisibility and recognizability traits of these metals were greatly enhanced. Critically, the scarcity of monetary metals is governed by natural laws that are beyond the control of man, making their supplies (mostly) resistant to greedy manipulations. Gold became, and remains, the prime monetary metal of the world precisely because of its superior relative scarcity — historically, it has been the best reflector of absolutely scarce time.
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Gold is the hardest monetary metal to produce and nearly every ounce ever mined remains part of its extant supply today, as it is chemically an ultra-stable element. Taken in combination, these properties made gold the best medium for storing value across time, as its supply is the most resistant to change, and therefore the most inflation-resistant. By providing sufficient monetary characteristics (divisibility, portability, durability, recognizability) coupled with superior physical scarcity, gold was naturally selected as money on the free market (hard money). With a (low) reproducibility and physical scarcity most closely aligned with the absolute irreproducibility and scarcity of time, gold has been the most credible store of value historically — which explains why freely acting individuals have hoarded it for centuries. More technically, gold’s superior stock-to-flow ratio makes it more resistant to supply inflation (and, its corollary, monetary value dilution) than all other monetary technologies (prior to the invention of Bitcoin).
In Part 3, we will look at the game-theoretic aspects of markets and money, and money’s deep relationship with time…
Thank you for reading Bitcoin and the Tyranny of Time Scarcity (Part 2).
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