The next installation of the incredible Gradually, Then Suddenly series of blog posts by Parker Lewis has been published. This post combats the ridiculous claim thrown by uninformed Intellectual Yet Idiots that Bitcoin is a pyramid (or Ponzi) scheme.
While the title of the post references pyramid schemes, the meat of the post amounts to a tour de force exposition of the price mechanism. This is an absolute must read, long as it is, if you’re new to the idea of the price mechanism or Austrian economics.
As Parker explains, market prices of goods and service are what provide information to market participants and ultimately coordinate economic activity. It is simple supply and demand of each good relative to supply and demand of money that dictates the market price of any good or service. Prices, therefore, communicate information to all market participants about how to allocate capital.
As each individual the world over integrates information about market prices with their specific skills and knowledge to determine how to best allocate capital to maximize value, in aggregate at a global scale, the price mechanism assimilates all the world’s individual knowledge and information to provide the greatest distributed system of knowledge about market conditions possible. The better this system of knowledge functions to reflect supply and demand of goods and services, the better capital is allocated. The better capital is allocated, the better economic activity is peaceably coordinated. The better economic activity is coordinated, the greater the wealth and living standards of the world grows.
Here we begin to see Bitcoin’s promise.
It is Bitcoin’s mathematically based finite supply that makes it a strictly superior monetary good (relative to any other option available, fiat money or otherwise) for the task of communicating information via the price mechanism. After all, it is money that is the foundation of the pricing mechanism.
We know all too well that current monetary systems are highly manipulated, with central banks increasing the money supply in unpredictable and often reactionary manner. Because Bitcoin’s supply is governed by mathematics, it is perfectly predictable and finitely scarce. Thus, it provides a constant to price goods against.
Think about it…
To best let the price mechanism function, to best allocate capital and maximize the wealth of the world, would you want to base prices on a monetary system that is always changing at the whim of central banks?
Hell no.
You’d want to price goods against the constant, predictable monetary system to more reliably communicate information to market participants.
Similarly, you wouldn’t want to build your house on a foundation of sand, you’d want to build it on stable bedrock. Nor would you want to build your house using a tape measure in which an inch varies each time you make a measurement.
Each time central banks change monetary policy or increase/reduce the money supply, they distort the pricing mechanism. They change the measuring stick. This in turn causes capital misallocation and a horrible dead weight loss in the progress of civilization.
It’s time to build civilization on a solid foundation. It’s time for Plan ₿.