The popularity of currencies that experts claim have no intrinsic value is rising – do they have it wrong?
Financial experts often state that a currency needs to be backed by a government to have intrinsic value. If this is true why have currencies not backed by any form of government been increasing in popularity? Is it time for some new theories about money?
Some financial theories can be dogmatic and rhetorical, lacking basic science. A good scientific theory should not only have a theory or hypothesis that can be proved but more importantly have the ability to be disproved – also known as the null hypothesis. Furthermore if a theory can be used to make new and observable predictions then you know you’re on good scientific ground.
One such theory often touted by experts is that a currency needs to ‘be backed by a government’ to be secure and have value. So we can test this hypothesis by looking at currencies in popular use and see if they are backed by banks and governments and see that in most instances this is true.
Now, let’s check the null hypothesis: do people value any form of currency or money not backed by a government or its banks? Here we find the null hypothesis is also true meaning we are on shaky scientific ground.
The Somali Shilling.
The Somali Shilling was a fiat currency originally issued by the government of Somalia when it came to independence in 1962. However when war broke out in Somalia in the early 90s the government and banks issuing the currency collapsed. Within their fiefdoms warlords attempted to issue their own currencies, however this caused localised spikes in inflation and none of these alternative currencies gained traction. To this day the Somali Shilling has remained the most widely used currency throughout Somalia.
With money printing stopped, the supply of Somali Shilling has remained fairly stable apart from the occasional forgery that slips in. This may in part account for its increase in value against the USD last year; more than three times that of the Seychelles rupee, and almost five times the Icelandic krona.
The intrinsic value of money.
Many proponents of fiat argue that the major value component of a fiat currency is the ability to legally enforce debt payments and fines in the courts of the country that issued it. It is on that basis many experts argue that Bitcoin has ‘no intrinsic value’ as it’s not backed by a government.
Firstly, as we’ve shown with the example of the Somali Shilling, this theory is on rather shaky scientific ground.
Secondly, Bitcoin does have intrinsic value above fiat; anyone who says otherwise doesn’t understand what Bitcoin is and is therefore not qualified to comment.
Here is where I’m going to get technical, bear with me: Bitcoin is the monetisation of proof of work. That is to say the proof of work or complex mining calculations required to generate each block are pretty much impossible to forge with current technology.
So what does that mean for Bitcoin’s intrinsic value?
- The money system is decentralised; no one party can exert control over it.
- Transactions cannot be reversed.
- Money can only be spent by the party who controls that account.
- Money held in escrow cannot be stolen.
- Forgeries are impossible.
- Money can be sent securely.
- Money can be sent cheaply or at no cost.
- Money can be sent anywhere with a network connection.
- Double spends can be prevented with a high level of statistical accuracy.
These are some very significant advantages over fiat money and a step change in the way money transfer works: none of the above can be done with physical notes and coins or digital transfers between banks. I know which currency I’d rather be using.
Time for a new theory of money?
Finding a new theory of money is beyond the scope of this blog. But I can certainly give some pointers as to where I think the best evidence of what money is and where it comes from lies.
Just as no one person created society, cities, towns and the concept of morality I would argue that no one created the concept of money. The concept of money exists innately in people. To look at it from an evolutionary basis it is selectively advantageous for us as social animals to agree on a common medium of exchange that underpins our societies. No child ever questions the concept of money, but every child has an intuitive understanding of what it is, how to use it is and of course every child wants it.
But why do humans have money when other social animals do not? The answer is in the unique flavour of cooperation that exists in human society. We exist in a rather unique niche where it’s to our advantage to cooperate with our neighbour, whilst at the same time trying to out-compete them: humans are both cooperative and competitive.
So a possible new theory of money would be something like: Group consensus on a medium of exchange selectively benefits a group who’s individuals are both cooperative and competitive and is therefore an evolved concept.
This is a good starting point as a null hypotheses can easily be constructed from this: Group consensus on a medium of exchange does not selectively benefit a group who’s individuals are both cooperative and competitive and is therefore not an evolved concept.
So to prove this we would need to find societies that prosper – are selected for – with the concept of money and to disprove the null hypothesis we would need to find societies that prosper without the concept of money.
We can even stretch the hypothesis to make predictions: other organisms which are both cooperative and competitive should be able to grasp the concept of money. That is to say organisms which have evolved similar socials structures to ours should share a similar concept of value and trade as humans have.
Take a look at the links below investigating primate economics. The first two examples look at whether primates can pick up an innate concept of economics. The second weather primates have an innate sense of value.
All seem to show good evidence against the null hypothesis, i.e. adding further weight to the likelihood that the hypothesis is correct and also align with predictions that the hypothesis makes.
Our established theories of money and value are crumbling because until now there have not been a sufficient variety of alternatives to test the entrenched theories. Irrespective of whether Bitcoin is here to stay or not our current theories of economics do not fit the emerging modern financial world and need to adapt, just like the monkeys did.
Until next time,