Given the current global economic backdrop of soaring debt levels, excessive deficit spending, emergent inflationary pressures, and financial uncertainty, the principles of Austrian economics appear strikingly relevant.
The advent of bitcoin – humans’ most successful attempt at a decentralized, digital form of money – has ignited a global monetary revolution, growing from a small spark to a robust flame over the past fifteen years. This spark, however, was not an accident or random occurrence, but the culmination of several decades of work by cryptographers and computer scientists throughout the 1970s, ‘80s, and ‘90s (as Jesse Myers explains in a recent report). It’s worth considering, however, that bitcoin’s philosophical origins date back even further – all the way to the late 19th century in Vienna and the birth of Austrian economics.
Satoshi created the initial spark, and the cypherpunks laid the technological groundwork for how a spark could be created, but it was the Austrian economists who conceptualized what fire was and why it needed to exist.
Historians pinpoint the emergence of the Austrian school of economics in 1871, with the publishing of Principles of Economics by Carl Menger (1840-1921). This work focused primarily on the concept of marginal utility and is credited with solving the diamond-water paradox – i.e., the contradiction that diamonds command a much higher market price than water, even though water is far more critical to human survival than diamonds. Menger suggested that the true value of any particular good rests on the incremental satisfaction gained by the individual looking to acquire said good. This line of thinking represents the subjective theory of value and rejected the prevailing hypotheses that the value of a good was purely a function of the labor exerted to produce it or its perceived usefulness to society. In this sense, while water may have greater overall utility to society, an individual will inherently have greater appreciation for a diamond received, relative to their next sip of water – thus giving diamonds greater marginal utility in most scenarios.
Eugen von Böhm-Bawerk (1851-1914) – another member of the “first wave” of Austrian thinkers – expanded on these ideas about value with a hypothetical example of a farmer who has only five bags of grain. The farmer will create bread to survive with the first bag, he’ll create more bread to sustain himself longer into the future with the second bag, he’ll feed his farm animals with the third bag, he’ll make whiskey with the fourth bag, and he’ll feed the pigeons with the fifth bag. If any of the five bags are lost, the farmer will simply not feed the pigeons (as opposed to reducing each of his proposed activities by one-fifth). What this demonstrates is that value is subjective and ultimately dependent on specific circumstances of individuals – the first bag of grain (used for survival) has a greater marginal utility to the farmer than the fifth bag of grain (for the pigeons). Said another way, a man dying of thirst in the desert would pay much more for a sip of water than a diamond, but in a normal scenario where water is abundant, its marginal utility is far below that of a diamond.
The important undercurrent of these early musings of Austrian thinkers is that the value of a particular good, while subjective, is driven by the relative availability of the good to the purchaser – i.e., its scarcity. It is the incremental usefulness of each unit of water or diamonds, and their relative availability, that dictate their value, not the aggregate societal usefulness of water or diamonds. What really matters is how scarce the good is and more specifically, how scarce it is to a particular purchaser.
As the Austrian school of economics progressed into the early 20th century, it began to expand beyond philosophical arguments about the basis of value and find practical applications to the modern economy and monetary system. The first wave of Austrian thinkers established a foundation that suggested economic phenomena are best explained by understanding the decisions of individual actors, asserting that broader economic trends and patterns emerge from the aggregated choices of these individuals. Economists like Ludwig von Mises (1881-1973) and Friedrich Hayek (1899-1992) spearheaded the second wave of Austrian thought which focused on the most important “good” of all – money.
Mises and Hayek believed that money and its associated value – like any other good – should result and evolve from organic free market processes. In other words, money should derive its value from the collective importance that individual actors place upon it, as opposed to a decree of value from a centralized authority. In that respect, the Austrians criticized interventionist policies from central banks and artificial manipulations of the money supply as distortive and potentially damaging to the health of an economy. As Mises described in Human Action (1949): “Government is the only agency that can take a useful commodity like paper, slap some ink on it, and make it totally worthless.”
As this sentiment plainly illustrates, the Austrian thinkers heavily scrutinized central planners and believed in the separation of money and state. Indeed, for nearly all of human history, the issuance and machinations of money were not controlled by any particular state. For thousands of years, humans coalesced around gold as the predominant form of money due to its inherent properties of durability and scarcity. It wasn’t until the advent of fiat currencies that this dynamic began to shift and money moved concretely into the purview of the state.
It is through this historical lens that the philosophical origins of bitcoin become abundantly clear. Bitcoin represents the separation of money and state in the digital age, and the monetary frameworks pushed forth by the Austrian thinkers are the conceptual ancestors to bitcoin’s architectural and economic design.
1. The Importance of Sound Money: One of the foundational tenets of Austrian economics is the concept of “sound money.” Whereas sound money (or hard money) is difficult to produce and resistant to centralized control, unsound money (or soft money) is infinitely replicable and easily manipulated by central planners. It is this distinction that makes the soundness of money the most significant factor in the reliability of a currency’s value.
As Mises articulated in The Theory of Money and Credit (1912): “The sound-money principle has two aspects. It is affirmative in approving the market’s choice of a commonly used medium of exchange. It is negative in obstructing the government’s propensity to meddle with the currency system … The excellence of the gold standard is to be seen in the fact that it renders the determination of the monetary unit’s purchasing power independent of the policies of governments and political parties.”
For Mises, the societal trust in the gold standard that existed for centuries was a function of its immunity to capricious government actions and monetary debasement. This revered principle is at the core of bitcoin’s value proposition, and why bitcoin is commonly perceived as digital gold. Governed by a rigid algorithmic supply cap of 21 million coins, bitcoin stands as a defiant bulwark against unchecked monetary expansion, a phenomenon all too familiar with fiat currencies.
The importance of sound money was echoed by Hayek in his lecture, Toward a Free Market Monetary System (1977): “I am convinced that if we ever again are going to have decent money, it will not come from government: it will be issued by private enterprise, because providing the public with good money which it can trust and use can not only be an extremely profitable business; it imposes on the issuer a discipline to which the government has never been and cannot be subject.”
Bitcoin clearly reflects Hayek’s vision of a more trustworthy currency derived from free market processes. As a decentralized digital commodity, its issuance is not governed by any central authority but by cryptographic proofs and global consensus amongst its network peers. Bitcoin is the modern manifestation of the Austrian vision for a decentralized sound money that is able to preserve its purchasing power over time.
2. Reimagining the Concept of Trust: At the heart of most economic systems there exists an inherent element of trust. Traditional financial systems have long been anchored to trust in institutions, placing confidence in central banks, regulatory bodies, and governments. However, Austrian thinkers would argue that such unwavering trust in centralized institutions can lead to systemic vulnerabilities and inefficiencies. In the words of Hayek in The Denationalisation of Money (1976): “The past instability of the market economy is the consequence of the exclusion of the most important regulator of the market mechanism, money, from itself being regulated by the market process.”
The emergence of bitcoin represents a paradigm shift in solving the conundrums that stem from incumbent trust structures, reshaping money as a commodity regulated by market forces rather than centralized entities. At a fundamental level, bitcoin redefines the concept of trust, allowing users to place faith in cryptography and mathematics, as opposed to fallible humans. Bitcoin’s pseudonymous creator, Satoshi Nakamoto, articulated the issue in an online forum post (2009): “The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”
This perspective represents Satoshi’s core motivation in creating bitcoin and is perfectly aligned with the Austrian school’s apprehensions about the unrestrained powers of governments and central banks. Bitcoin introduces a transition from human-driven systems, susceptible to biases and political motivations, to a protocol governed by immutable and programmatic code.
The US regional banking crisis in early 2023, catalyzed in part by duration mismatches stemming from the fastest interest rate hike cycle in history (a wishful attempt by central planners to combat inflation), serves as an illustrative recent example of how placing outsized trust in policymakers and financial institutions may be misguided. In response to the crisis they had a hand in causing, the Federal Reserve created the Bank Term Funding Program (BTFP) to inject liquidity into the banking system (a creative form of monetary expansion), highlighting the fragility and repeated breaches of trust inherent to centralized, fiat-based monetary systems.
3. The Power of Decentralization: A central theme of both Austrian economics and the foundational ethos of bitcoin is an emphasis on decentralization. More than just a technical distinction, decentralization represents a philosophical shift towards the distribution of power, control, and decision-making capabilities from centralized entities to individuals or localized systems.
In his essay, The Use of Knowledge in Society (1945), Hayek argued that individual, localized knowledge in an economy is indispensable for efficient resource allocation, noting: “It is a problem of the utilization of knowledge which is not given to anyone in its totality… The knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.”
Bitcoin’s architecture encapsulates this philosophy. Its decentralized structure, governed by a globally distributed network of nodes, ensures that no single entity has overarching control or influence over the protocol, and in turn its monetary policy. This is not just a technological achievement, but a realization of Hayek’s vision of decision-making via localized information as opposed to centralized directives.
Moreover, bitcoin’s design underscores the advantages of decentralized decision-making processes, wherein millions of individual participants collectively influence market outcomes. Mises spoke about the significance of spontaneous market processes in Socialism: An Economic and Sociological Analysis (1922): “All rational action is in the first place individual action. Only the individual thinks. Only the individual reasons. Only the individual acts.”
Said another way, the cumulative wisdom of individual actors represents the foundation of a truly free market. Bitcoin’s price isn’t determined by a centralized authority or pegged to a particular asset but emerges organically through global exchange amongst peers. Both Austrian thinkers and bitcoiners champion the notion that value, uninfluenced by centralized intervention, is most accurately discerned through the collective interactions of individual actors in a free market.
In the early 20th century, the Austrian school laid the groundwork for understanding economic phenomena and market fluctuations. Mises and Hayek contended that boom-bust business cycles arose from central bank interventions, particularly when artificially depressed interest rates spurred excessive investment in long-term initiatives. These malinvestments, they argued, would inevitably lead to economic downturns as their unsustainability became evident or as monetary policymakers readjusted rates.
However, as the tumultuous events of the Great Depression and World War II unfolded, the prevailing narratives around economic theory evolved. John Maynard Keynes pioneered a school of thought that challenged Austrian views, advocating instead for the potential benefits of state intervention to bolster demand and hasten economic recoveries. Keynesianism promoted an active governmental role in economic stabilization which, given the uncertain nature of the times, found broad acceptance and diminished the prominence of the Austrian approach.
While the Austrian perspective cautioned against unchecked central bank actions, Keynesian economics and later Modern Monetary Theory (MMT), largely ignored the negative externalities of centralized control and monetary intervention. MMT is rooted in the belief that nation states which actively manipulate their currencies can navigate massive amounts of debt by tinkering with interest rates and expanding the money supply. This reliance on government intervention in the economy, while appealing to some, is seen through the Austrian lens as inherently dangerous. History is fraught with illustrative examples of hyperinflation, particularly across emerging markets, which serve as stark reminders of the perils associated with unrestrained monetary policies.
Fast-forwarding to the 21st century, there has been a resurgence in the reverence for Austrian principles amidst unprecedented levels of global debt and significant economic challenges. Bitcoin’s emergence – not coincidentally following the Great Financial Crisis of 2008 – embodies the tenets of sound money and decentralization, resembling forgotten Austrian doctrines and suggesting a potential revival of Austrian economic perspectives in the digital age.
Given the current global economic backdrop of soaring debt levels, excessive deficit spending, emergent inflationary pressures, and financial uncertainty, the principles of Austrian economics appear strikingly relevant. The Overton Window is beginning to shift with respect to individuals’ understanding of monetary debasement and the erosion of purchasing power.
In this context, the rise of bitcoin should not be perceived as an anomaly, but as a natural reaction to the uncertainty that pervades modern fiat-based economies. Bitcoin represents a financial refuge amidst the unpredictability of central bank decisions and short-sighted monetary policies. With an immutably fixed supply and decentralized structure, bitcoin offers a promising alternative to the inflationary perils of fiat currencies.
Austrian economics – rooted in individual fiscal sovereignty – profoundly reflects the ethos of bitcoin, which provides users autonomy over their financial futures, free from third-party interventions. As bitcoin adoption marches forward, it’s becoming increasingly evident that the teachings of the Austrian school are in the midst of a much needed renaissance.
Bitcoin is the modern manifestation of an economic philosophy that was cast aside for decades while fiat currencies proliferated. It is important to recognize that while unbacked fiat currencies are a monetary experiment of the past several decades, the foundational tenets of Austrian economics, now expressed through bitcoin, are the product of centuries of thought about what gives money value.
This was originally published on Onramp Deep Dives