One might cut Paul Krugman a bit of slack for his sorry tale of three money pits, as twice a week he faces the challenge of coming up with an economics column with some manner of hook. Unfortunately, with great prizes (and compensation) comes great responsibility, especially when an academic knowingly exploits fallacies to advance a political agenda.
For its users, money has three classic functions: a medium of exchange, a unit of account, and a store of value. For its government producers, money has three other functions: a source of seignorage, a means of taxation, and a lever of macroeconomic influence. Theses various purposes can sometimes conflict, so tension arises when a monetary innovation appears that better serves some stakeholders than others. As a devout Keynesian, Krugman has the ongoing mission of defending government fiat currencies against all alternatives, whether modern digital or traditional commodity-backed currencies, using any means necessary, not limited to the intellectually honest.
Krugman’s Three Money Pits are 1) the open-pit gold mine in Porgera, Papua New Guinea, 2) the bitcoin mine in Reykjanesbaer, Iceland, and 3) a hypothetical money pit from Keynes’ head. Porgera’s mine is a litany of human-rights horrors, and Krugman implies that gold consumers are somehow to blame. Porgera is really just one example of the resource curse, which applies to numerous countries rich in natural resources but short on democratic institutions. If Krugman drives a car, is he similarly troubled by the provenance of his fuel, the rubber in his tires, or the elements (platinum, palladium, and rhodium) in his catalytic converter? If Krugman laments “burning up resources”, what consumption does he consider to be non-frivolous? Flying to Europe, as he is wont to do, consumes a great deal of resources, not to mention producing a great deal of pollution. If Krugman dislikes commodity-backed currencies and trading with developing nations, one might expect him to enthusiastically support the bitcoin server farms in Iceland: here is a Scandinavian country using renewable resources to produce money out of thin air! Even better, if bitcoin has an intrinsic value, it is as a medium of transferring value globally with almost no transaction costs, an incredible boon to the citizens of developing countries who work in developed nations and currently pay 10% commissions to send home remittances. But no—Krugman reveals his value preferences: a currency not under the control of government and banks is a threat, regardless of its other benefits. A non-arbitrary supply might be the only thing that gold and bitcoin have in common, but for Krugman that is all that matters. His framing of gold and bitcoin as violating human rights and despoiling the environment is designed to arouse emotion and bypass reason.
Bitcoin mining does have a cost, but clearly the total cost is less than that of banks, because in the end bitcoin transactions can be made for commissions that are orders of magnitude lower than the 1–10% that is typically charged by banks, PayPal, the credit cards, and Western Union. Krugman ignores the overhead costs of the current monetary and banking systems, which are clearly non-trivial. The massive computing power devoted to bitcoin is dwarfed by that devoted to recreational uses, from multiplayer games to streaming pornography. Perhaps Krugman has an opinion there also.
When he recruits Adam Smith and John Maynard Keynes into the discussion, Krugman makes more appeals to emotion. He describes Adam Smith as a “patron saint” to conservatives, who resist public spending for creating jobs as “anathema”—clearly conservatives are religious and dogmatic about economics. Meanwhile Krugman paints Keynes as a scientist with theories so accepted that resistance to them must be “political”. Last I heard, scholars in the dismal science had by no means reached a consensus about Keynes’ ideas that a national government can spend money, even burying valuables in a pit, and stimulate more value creation than value consumed.
Adam Smith did indeed call for banking regulation, as Krugman points out gleefully while neglecting to mention the context. In the same paragraph of The Wealth of Nations where Smith mentioned the “dead stock” of silver and gold, he described the precariousness of an economy “suspended upon the Daedalian wings of paper money” rather than traveling upon “the solid ground of gold and silver.” Smith promoted not fiat money, but paper money backed by gold and silver. Smith expounded on the dangers and drawbacks of paper money, but bitcoin is not subject to them. To store value bitcoin leaves no “dead stock”, and its value does not depend on the reliability of human beings. Of course, not everyone would agree with the notion of “dead stock”—to a non-Keynesian, storing value is a respectable function, and if money will not do it properly, people will find other value stores, e.g. larger houses than they need for lodging.
Krugman’s funniest statement was his conclusion, disparaging both gold and bitcoin as “a determined march to the days when money meant stuff you could jingle in your purse” and “digging our way back to the 17th century.” This is certainly a novel way to describe a digital currency that is based on 21st-century NSA-approved cryptographic algorithms and that can be transferred instantly and globally via the Internet without bank intermediaries. I fear that Krugman is the one becoming old-fashioned.