Tag: Scarcity

Bitcoin as a manifestation of Misesian praxeology

“Unlike the mainstream neoclassical economic theory focused on mathematical equilibrium models, praxeology centers on the fundamental logic underpinning human choice itself”

Among the multitude of parallels between Bitcoin and Austrian economic theory, one of the most fascinating is how Bitcoin effectively exemplifies the Misesian philosophical foundation of praxeology in practice. The creation and adoption of this pioneering cryptocurrency is an astounding real-world case study validating many of the core tenets put forth by the luminary economist Ludwig von Mises.

At its essence, Mises’ praxeology is the deductive study of purposeful human action, based on the notion that humans engage in conscious behavior to achieve desired ends utilizing the most appropriate means available according to their perception and circumstances.

Unlike the mainstream neoclassical economic theory focused on mathematical equilibrium models, praxeology centers on the fundamental logic underpinning human choice itself. Mises argued that properly defined, economics is the analysis of every conscious action an individual undertakes to substitute a more satisfactory situation for a less satisfactory one.

The Birth of Bitcoin Through Voluntary Choice
Bitcoin was created in 2009 by the anonymous cryptographer Satoshi Nakamoto, but its revolutionary rise as an alternative monetary system perfectly encapsulates the voluntary, human-centric nature that Mises expounded.

At the core of Nakamoto’s white paper proposing Bitcoin was a model for achieving monetary integrity and independence from ruling authorities through a decentralized, peer-to-peer electronic cash system. It established a way for transactional value to be transferred globally, instantly, with no third-party intermediaries, fees, or artificial constraints.

While that may seem an ambitious enough goal, the more philosophically profound implications are how Bitcoin achieved this feat solely through the exercise of individual human action and voluntary coordination.

No centralized institution, government mandate, or backing asset was required for Bitcoin’s existence. It was formed, adopted, and grown organically through the purposeful actions of distributed humans evaluating the proposed system, recognizing its potential superiority as a means to achieve desired ends over fiat currency norms, and freely choosing to participate in production and exchange on the network.

This embodiment of voluntary, self-interested yet productive behavior aligns squarely with Mises’ conception of humans as “rational actors” perpetually seeking to improve their respective conditions by whatever means their offered circumstances and knowledge allow.

Visualization of the concept of "rational self-interest" as defined in Austrian economics

Praxeologic Properties of the Bitcoin Network
Beyond its grassroots formation reflecting Misesian thought, numerous other attributes of Bitcoin closely adhere to praxeological principles as well:

  • Decentralized structure with no centralized authority enforcing rules or value
  • Open source protocol rules allowing for inspection and voluntary participation
  • Free market dynamics determining Bitcoin’s value through economic calculation of supply/demand
  • Constant economic activity through mining and trading as the means to achieving desired monetary ends
  • Incentive mechanisms encouraging productive, self-interested participation to secure the network
Diagram illustrating the decentralized structure and cryptography behind Bitcoin's network

Austrian philosopher Hans-Hermann Hoppe even described Bitcoin as “an exemplary case of Misesian human action… demonstrating the importance of entrepreneurship, property rights, and economic calculation for the emergence of free markets and rational sustainable order.”

Hans-Hermann Hoppe, an Austrian school economist and libertarian/anarcho-capitalist philosopher

The Emergence of a Spontaneous Bitcoin Order
Perhaps most crucially, Bitcoin exemplifies what Mises described as spontaneous order theory – the ability for complex systems and institutions to form and maintain themselves purely through the voluntary and self-directed motivations of participating individuals, rather than top-down design or authority.

Visualization of complex systems emerging from spontaneous, unplanned order

Bitcoin arose with no centralized planner, organized institution, or regulatory scheme dictating its existence or adoption. It grew spontaneously as a Bottom-up order through the free association of humans independently evaluating its benefits as a preferable money system to their current situations and choosing to create and exchange value on it accordingly.

This process of rational human actions coalescing into larger spontaneous orders that satisfy widespread demand is a pivotal aspect of Misesian thought. Bitcoin arguably represents the emergence of an entirely new robust monetary order formed not by ruling corporations or governments, but from the purposeful pursuit of individually perceived ends by volunteers worldwide adhering to an open, distributed protocol.

In this sense, Bitcoin is not just a technology but a stirring testament to Mises’ conception of praxeology itself – how the liberty for individuals to act purposefully through available means toward their desired aims can manifest complex systems and solutions superior to those derived through centralized, imposed methods.

As Bitcoin evolves and impacts the global monetary order, it will remain a compelling phenomenon through the lens of Misesian economic philosophy and the principles that so remarkably parallel its creation and continuing operation.

The Deflationary Nature of Bitcoin’s Hard Cap Supply Through an Austrian Lens

“crack-up boom”

Bitcoin is often called “digital gold” – a reference not just to its scarcity and use as a store of value, but also its deflationary monetary properties. Like gold, Bitcoin has a strictly limited supply that is fundamentally distinct from fiat currencies which can be printed endlessly by central banks. 

Bitcoin logo, comparing bitcoin as digital gold

This deflationary hard cap on the Bitcoin supply is one of its most defining characteristics and a key reason it aligns with the teachings of the Austrian school of economic thought. Let’s explore the implications of Bitcoin’s fixed money supply through the lens of Austrian economics.

The Austrian View on Money Supply

Portrait of Ludwig von Mises, Austrian economist

A core tenet of Austrian economics is the rejection of artificially inflexible money supplies controlled by central authorities. Influential Austrian thinkers like Ludwig von Mises and Murray Rothbard argued that constantly expanding the money supply through bank lending and money printing inevitably leads to distorted price signals, wealth redistribution, and economic booms followed by painful busts.

llustration of the Austrian economics 'crack-up boom' hyperinflation concept

In Mises’ scenario of the “crack-up boom“, once the public recognizes that a currency is losing value due to over-issuance by the monetary authority, they begin to dump it rapidly in favor of undervalued real goods – causing hyperinflation to spiral out of control. The only way to avoid this dire outcome, Austrians argue, is by ensuring a truly limited monetary supply governed by the market rather than artificial constraints.

This makes Bitcoin’s fixed supply of 21 million coins particularly attractive from an Austrian perspective. Its monetary policy cannot be manipulated, inflated or debased at will since the total supply and issuance schedule is predetermined by the protocol’s code itself. No central planner can simply “print” more bitcoins into existence.

The Rules of Bitcoin’s Hard Cap

Bitcoin supply schedule showing coin issuance and halving over time

Bitcoin’s capped maximum supply is enforced through several key rules hardcoded into the protocol:

1. Only 21 million bitcoins can ever be created. This is the absolute ceiling.

2. New bitcoins are released slowly through a predetermined issuance schedule, not all at once. They enter circulation through the block reward given to miners for validating transactions.

3. The block reward started at 50 BTC in 2009 and is cut in half every 210,000 blocks mined (about every 4 years) in an event called the “halving” or “halvening”. This geometric issuance rate continually slows over time.

4. The last bitcoin will be mined around the year 2140 after which no new BTC will ever be created. Regular block rewards to miners will then come solely from transaction fees.

This hard cap combined with diminishing new supply over time creates a disinflationary or deflationary monetary supply curve. Unlike fiat currencies which tend toward constant inflation by design, bitcoins are guaranteed to become more and more scarce relative to any growing economic output.

The result is essentially the digital money version of a perfectly inelastic supply, which is the ideal case argued by Austrian economists. With an unchangeable cap, Bitcoin supply cannot be influenced by monetary policy decisions or fractional reserve lending expansion which Austrians view as destructive to a stable, hard money system.

Time Preference and Bitcoin

Another Austrian principle that aligns with Bitcoin’s nature is the economic theory of time preference. Established by economist Eugen von Böhm-Bawerk, time preference refers to the human tendency to value present goods higher than future goods, all else being equal. We prefer to obtain something now rather than later.  

This drives interest rates, as people must be incentivized through higher future value to willingly delay present consumption. It’s why $100 today is considered more valuable than $100 a year from now, and why interest must be paid on loans.

With Bitcoin’s scheduled halvings roughly every 4 years, time preference comes into play. Potential Bitcoin investors must decide if it’s worthwhile to obtain and hold the present supply of bitcoins knowing their future purchasing power will likely rise as supply issuance slows towards the 21 million.