Understanding the Free Market

My Quest in Understanding "Free" and "Market"

For the past 12 months, I’ve been on a quest to learn about the free market. I wish to understand the “isms” better, may that be fascism, communism, capitalism, or socialism. An integral part of any of these systems is the notion of a market, or the lack-thereof. Throughout my study, I have heard mention of free markets and its opposites; command, planned, or controlled economies. In short they all alter the means of production, and the distribution of wealth differently. In this letter, I intend on highlighting 3 insights I’ve received that have helped me form a more complete picture of the socio-economic circumstances surrounding Bitcoin and Cryptocurrency.

1. We Have Socialist Money

There is nothing really free about our money, aside from how flippantly our central banks are printing it. What do I mean when I say we have socialist money? I mean that in each and every one of our countries, the production and distribution of money is controlled by centralized entities; i.e. the central bank or federal reserve. If you control the supply, and can alter it based on demand, then you control the price. This is called having a monopoly on money. The government has broken up monopolies in the past (such as American Tobacco) and may do so again in the future with tech giants like Facebook and Google.

Central banks have the monopoly on money, but are allowed to remain operational. This wasn’t the case for most of human history. Yes, we’ve had government issued currency, for as long as we’ve had government (and monarchies), but we’ve never seen a total monopoly on money. Gold was the last (semi) decentralized money, wherein the gold miners controlled the production, and the free market set the demand.

Is There Anything Wrong with Centralized Money?

On the surface, I cannot really tell if there is anything inherently wrong with centralized money. The ability to create money (not value) out of thin air seems to be an issue, but economists insist that this is a good thing for growth and stimulation under Modern Economic Theory. Still, something doesn’t sit quite right with me to have the supply of money set by a centralized entity. One major thing I’ve learned about centralized money is that it is difficult to predict when the centralized entity will intervene in the economy, and in what ways.

Take the 2008 financial crisis for example. The federal reserve intervened by printing more money to bail out the banks. This prevented a complete collapse of the system, but didn’t seem to change the underlying circumstances that caused the crisis in the first place. In this way, centralized money seemed to be a band aid for the problem created by cronyism1, rather than the solution to ridding the system of corruption.

Privatized Gains, and Socialized Losses

We only have the ability to socialize the losses of others because we’ve granted ourselves the ability to print money. Without this supreme ability, the losses would have to be felt by those whom are responsible for them in the first place. When I say we have socialized money, I mean that we have the ability to set the price of money, and bail out banks, corporations, and industries that are too big to fail. I am more for letting these things fail out of the philosophy that we can build something better out of the ruins of yesterday. If they failed for a reason, I don’t think we should have the ability to keep them alive by degrading the value of the dollars that belong to each and every one of us.

2. Cash Goes Down in Value Over Time

The stability of cash is an illusion. It really doesn’t exist at all. This is what I mean when I say that the price of your money is fixed, or set by the central banks. It looks like the value of your money is staying the same, mostly because it is. However, the price of everything else around you is increasing. Take Lumber, Microchips, Aluminum, and Steel for example2. They’ve all radically increased in price this year, which in turn is pushing the price of things build with these commodities up as well. When we look at assets such as stock, real estate, and Bitcoin we see an even more steep incline in price.

When I was a child, I was able to go to the store with $1, and purchase a bag of candy and a chocolate bar. Ten years later, I was lucky if I could buy a single chocolate bar. This realization about cash lead me to make all sorts of other realizations about the wealth gap present worldwide. The wealthy among us have the ability to purchase assets, protecting them from the price decline in cash. The poor among us live paycheque to paycheque, and typically have savings in cash. This disparity perpetuates an already enormous gap in wealth by putting assets further and further out of reach. This is one reason I really like Bitcoin. It is divisible, and thus able to be owned in denominations accessible to every single person, regardless of their income level. The inability for the average individual to purchase assets, is not exactly what I would call the free market.

Once you reach the realization that cash decreases in purchasing power over time, you start to realize that stability is not the normal state of the economy. Volatility has, and always will be the prevailing truth within markets; and perhaps the entire universe.

Change is the only constant — Heraclitus

Ultimately, I believe this makes sense. Why would we expect stability in a world that is ever changing? I think it is an exercise in hubris to think that we are able to bring stability to modern markets through the manipulation of money. In reality, all we are doing is hiding volatility inside of inflation. On small time-scales it is enough to fool most of us, but on a long enough time horizon, we can see the macro-effects of inflation taking hold.

3. The Free Market Relays Truths about the Price

A beautiful lesson I learned about the free market is that it is compiling, condensing, and relaying truths about the world, in the form of “price”. The price of something is the result of millions (billions) of people contributing to the supply and demand of that stock, commodity, asset, or money. The demand for something fluctuates based on information available to the public, and how that information is perceived. The supply of something fluctuates based on the groups that control the means of production. The end result is a single number that can be thought of as the true price of that item in that given moment.

In an optimally functioning free market, the price of something can be trusted. However, when there is a monopoly on money, and the price of money itself can be manipulated, it can distort the prices of everything that is measured in terms of that money. For reference, the whole world uses the USD as the measuring stick for value. Since we use a manipulatable currency as the yard-stick for measuring value, we tend to get price distortions in the market, obscuring our view of reality. This nuanced view of the free market has been instrumental in understanding just how crucial it is that we adopt a money that is free from centralized manipulation. One of the major benefits of doing so would be increase the veracity of market information.

Some Notes about Bitcoin

Each of these realizations lead me to have ever more confidence in the success of Bitcoin. From the ground-up, Bitcoin was designed to directly oppose each of the features of centralized money.

  • Bitcoin has an unalterable monetary policy of 21 million coins. The supply is known, predictable, auditable, and verifiable at any point in time, by anyone. No price distortions are created by unexpected rises in supply. Price distortions (not to be confused with volatility) are disruptive to the economy because they are controlled, or orchestrated by a small group. (ex. 2020 negative oil prices due to Saudi Arabia flooding the market).

    Because we can accurately, and reliably predict the total supply, and when new supply is created, inflation is no longer a variable; it’s a constant. This is one less factor we need to take into consideration when trading or using Bitcoin. This is the aspect that I am most specifically referring to when described Bitcoin as decentralized money.

  • No one person or entity controls the price of Bitcoin. There is more than $50 billion dollars of volume being traded on Bitcoin, every single day. The more volume, from diverse sources, the more accurate the price is. Unlike stock markets, which are few and centralized, Bitcoin is traded in P2P marketplaces, and hundreds of exchanges from every corner of the globe. The result is a beautiful concurrence on the true price of Bitcoin. This ultimately shows us the true price of Bitcoin, and trust in the things we measure using Bitcoin as the yard-stick.

  • The price of Bitcoin is designed to increase over time. The supply of Bitcoin is set to decrease over time, arriving at a finite number. The more people that use Bitcoin, the more overall value the network accrues (Metcalfe’s Law3). The more value the network accrues, the more people want to join the network. Demand goes up, supply continues to decrease, and the cycle becomes self-perpetuating.

All The Best,

Keegan Francis