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An Ideal Style: Inside the Revelatory World of John Nash

An Ideal Style: Inside the Revelatory World of John Nash
Written by Jon Gulson @jongulson
Posted 01 May 2018

There is a popular narrative amongst Bitcoiners akin to this: banks are bad, inflation is theft, money has to be censorship resistant to be ‘sound money’; which also has to be trustless, decentralised, providing privacy and sovereignty which is free from government influence.

This narrative has gradually become polarised into opinions as to how Bitcoin should ‘scale’ – a euphemism for how Bitcoin can become an everyday cash system. 

To the Bitcoin cynic (often referred to in this emerging vernacular as Nocoiner) the infighting means Bitcoin can never achieve widespread adoption: the technology is too limited to be money, the prolific energy consumption is socially undesirable, users hoard or hodl as an inflation hedge so it can never become a meaningful economy with real investment; that Bitcoiners have no real understanding of economics – and generally speaking a bubble and scam divorced from modern money theory.

At this point, I’d like to introduce another approach to Bitcoin based on John Nash’s Ideal Money.

For those unaware, John Nash was an American Mathematician played by Russell Crow in the Hollywood film A Beautiful Mind. Nash himself shared the Nobel Memorial Prize in Economic Sciences 1994 and Abel Prize in 2015. He is regarded as the godfather of non-cooperative game theory and spent the last 20 years of his life bringing Ideal Money to the world’s attention through writings and talks.

Before we continue, the reader should understand Bitcoin itself is not ‘ideal’ and neither is it ‘Ideal Money’. The pre-programmed hard limit of Bitcoin is 21 million coins, for which 17 million have already been ‘mined’ (or bought into existence). 

This makes Bitcoin inelastic, so whatever demand there is for money – Bitcoin issuance remains unchanged. This puts it at odds with the prevailing Keynesian economic school of thought today.

From the Keynesian perspective, the Central Bank should actively manage and control the supply of money by making sure there is enough in times of growth and less in contraction. This is known as ‘optimal money’ and is achieved through inflation targeting of a local price index of the domestic currency.  

Despite ill feeling that may exist toward Central Bankers, this approach to money supply management has been relatively successful – perhaps unparralled – since introduced.

Elastic money management isn’t disagreeable with the competing Austrian school of economics, but the Austrians question the political nature of who decides and what constitutes the local price index to be targeted. To the Austrians, a local consumer price index is at best an educated guess as well as being reweighted over time which creates political noise in understanding price signals of commodities and encourages short term monetary policy thinking as a result.

Bitcoin is significant here in respect to John Nash’s Ideal Money, of which a predictable and stable International Consumption Price Index (ICPI) is axiomatic: a globally constructed and diverse metric of commodities to understand changes in world prices in respect to currencies of nations. Nash was aware of an imperfection to his ICPI in that both technology and geopolitical factors meant it could not be perfectly stable in mining production because of potential supply shocks and gluts.

So Nash imagined a miracle energy source and the affects this may have on the stability of such an index. With Bitcoin, mining power is offset by a difficulty adjustment algorithm which regulates the speed at which Bitcoin is mined. This means Bitcoin supply is a stable gold-like standard where currencies can be managed comparatively to each other and therefore achieve parity in purchasing power. Where this happens, we are in a scenario of Ideal Money.

The obvious objections from Keynesians at this point come from a perceived threat to their systems through ‘hyperbitcoinisation’ (inflation hedging in overdrive) pushing down the purchasing power of state money. In response to this, if state money were to increase in purchasing power over time then the significance of Bitcoin as an inflation hedge is reduced.

This then places all the world’s money on the same apolitical value trend and in the process strengthens the essence of Central Banks i.e. to manage money supply optimally.

So why an Ideal Style? This goes to the heart and fundamental nature of money, which is so ingrained in our psychology. It means if money is ‘Ideal’, we don’t have the neurosis of worrying about it or desire to fight over it. Money is often overlooked for the benefits it bestows in trade and social cohesion.

It means Bitcoin doesn’t need to scale in the way the popular narrative has us believe. If all secular currencies are following the same deflationary value trend, then a cash system can occur as retail prices become a decreasing fraction of overall consumer bargaining power. This is the computational trade off in Bitcoin. 

Satoshi’s limitation was Nash’s revelation.

Written by Jon Gulson @jongulson
Posted 01 May 2018
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