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From Crypto-Currency to Anarcho-Capitalism

Frisby [1]2,984 words

Dominic Frisby
Life After the State: Why We Don’t Need Government [2]
Unbound, 2013

Dominic Frisby
Bitcoin: The Future Of Money? [3]
Unbound, 2014

Within traditional, mainstream politics the assumption is that free trade is the preferred tool of the Right, and the state the preferred tool of the Left. One of the distinguishing features of the New Right is that it refuses to be beholden to money values and so it distances itself from the capitalist rhetoric of the conservative right. In recent weeks this New Right perspective has appeared in Patrick Le Brun’s “A Tale of Two Victims [4]” and in Vincent Law’s “The Dogma of Free Trade [5].” In both articles it is evident that the authors deplore the increasing gap between rich and poor and the attendant downgrading of the working and middle classes.

Patrick Le Brun’s article is particularly heartbreaking, detailing the sad case of Maria Fernandes who was working four part time jobs to make ends meet. Due to the unsociable hours that this required, she was forced to sleep in her car between shifts. She died of toxic fumes from a gas can kept in her car. Although three of her four jobs were with the same employer they were worked at different franchised outlets so she wasn’t entitled to the same benefits as a full time employee. She was also in receipt of state benefits despite working long hours. We are right to deplore the inhumanity that causes such misery, but it is striking that the solution proposed by the New Right is often so similar to that of the Old Left: a minimum wage, a cap on earnings, limits to free trade. And, because the New Right wishes to implement these sorts of policies it has been important for us to focus on how to gain control of state power. Certainly, the desired outcome of these sort of state interventions is entirely noble but are they effective? Dominic Frisby would answer, “no.”

In Life After the State, Frisby compellingly describes why the state is too big and why it causes harm even when it has benevolent intentions. Before moving on to the reasons for the state’s failures it is worth mentioning some of the evidence that Frisby presents to show why the state is failing. In particular, his chapters on health and education are especially impressive. Regarding health, in the UK there was the extraordinary waste of the Labour government’s IT project. £12 billion (US $20) was spent before the entire project was scrapped with nothing to show for it. As Frisby points out, if our taxes hadn’t been taken and wasted so profligately, many of us would have been able to afford private health care. He also mentions the poor standard of care received by many patients in the NHS, in particular citing the case of Kane Gorny who was refused drinking water until he died of thirst. According to a 2009 Healthcare Commission report [6], up to 1,200 people died due to poor care in Stafford hospital between 2005 and 2008. Frisby also mentions the serial killer Dr. Harold Shipman who was still on the General Medical Council’s register of doctors when he was sentenced to 15 life sentences for killing over 250 people. Such complacency comes easy to such bloated organisations, and Frisby shows persuasively that the NHS is run for the benefit of doctors rather than patients.

The situation in the US is no better. “Do Americans get value for money?” Frisby asks. “Though paying twice as much (as a percentage of GDP when compared to the global average), the US has a higher infant mortality rate than most industrialized nations and lies in 42nd place in the life expectancy leagues, behind the other G5 nations – Japan, France, Germany and the UK – as well as, notably, Cuba, in 37th.” (2174)

As for education, Frisby cites a study showing that 22% of 16-19 year olds at state schools are functionally innumerate, whilst 17% are functionally illiterate. In contrast, by 1880 over 95% of fifteen year olds were literate.  Considering that the average cost of teaching a child at a state school is currently £10,000 per year and the average private school fees are £10,200 per year it would seem that we are being severely short-changed by the state. Frisby’s preferred option for education is home schooling, but his point is that parents should be responsible for their children’s education and that they should have a genuine choice about it. At the moment, as is the case with healthcare, only the rich can afford the superior private option whilst the rest are left with the dysfunctional state option as a default.

Many people will think that removing state provision of health and education would be a complete disaster because the poorest members of society would lose out. But this is precisely the situation now with the continuing expansion of those sectors. Frisby’s innovative insight is that state provision of services actually worsens conditions for the poorest people rather than bettering them. He provides a fascinating account of how people used to organize their own healthcare through locally run Friendly Societies. By 1910 in the UK three quarters of the manual workforce were members of these societies. They would employ doctors to treat their members and provide sick pay. With the introduction of National Insurance in 1911 the workers were forced to pay the state for health care and often could not afford to continue paying for membership of the Friendly Society on top of that. In addition, doctors were able to demand higher wages from the state and they began to be priced out of the reach of the Societies. Thus the process began of moving from many efficient suppliers of healthcare to one, compulsory, inefficient supplier.

The question of choice, and the state’s role in eliminating it, is central to one of this book’s most important themes: the supply of money. Frisby is careful to differentiate the sort of capitalism he supports from that which is most commonly practiced. Under Thatcher and Reagan, so the folk wisdom goes, we had unrestrained market forces and unalloyed capitalism. But Frisby doesn’t recognize this as genuine capitalism at all, partly because the state increased in size through the 1980s and partly because the state controlled and monopolized the supply of money. It is the very nature of the money supply system as currently practiced that is the most corrosive force in society. It systemically transfers wealth from the bottom to the top. Governments issue money and then banks issue money (as debt) based on those reserves. In fact, “97% of money in the UK and in the US is created digitally by banks, and most of this money is created when people go into debt to them.” (1237) So, whilst banks issue money, the state has a monopoly on the currency used; you cannot opt out of the system, and this is why it is so exploitative. Furthermore, when governments measure inflation they exclude 90% of money from their calculations. This 90% includes money put into property and financial markets. Your wages will belong to the 10% of money that does go in to the inflation calculation. This money (measured by the Consumer Price Index) averages at 2.8% growth per year. But the amount of money in total in the UK has been increasing by 11.5% per year. This means that the value of property and financial assets increases much faster than wages; your money is being systematically devalued.

Frisby illustrates this process by way of an allegory that is so elegant it deserves quoting in full.

Imagine a tiny economy. There are 20 people in it. Of these, ten each have $1 in cash, so there is $10 in the entire economy. The other ten people each have an asset – these are the only assets in the economy and are each priced at $1. People quite happily buy and sell these assets for $1 each. If more assets appear in this economy, but the amount of money stays finite, the cost of assets will fall. But let us assume for now no new assets enter the economy.

One person – Mr. King – is suddenly able to magically create another $10 from nowhere. He decides to go out and spend some of this new money. He buys an asset for $1, which the vendor is happy to sell because, based on the knowledge the vendor has, that is the fair market price. Except that it isn’t because there is no longer $10 in the economy, but $20. At $1 the vendor has sold his asset too cheap – and he has received devalued money in exchange.

Mr. King then decides to outbid the others and offers $1.50 for another asset. This vendor is delighted, sells, probably feeling rather clever, and makes off with $1.50, but even he has sold his asset too cheap. Mr King, meanwhile, is becoming asset rich. The other vendors hear assets are now trading for $1.50 and now expect that price, which Mr King is happy to pay. In other words, asset prices are gradually rising to reflect the new money in circulation.

There are some big losers in this process – the people who each had $1. The purchasing power of their money is now no longer enough to buy an asset they were previously able to buy. Ultimately, their purchasing power will halve because there is twice as much money in circulation. They haven’t acted imprudently in any way – they haven’t even acted – yet they are made poorer by this process of other people creating new money.

What about the people holding the assets? How have they done? Eventually, asset prices in this economy will rise to $2 – there are ten assets and $20 in circulation. The price of their assets should rise to reflect this extra money in circulation, so – as long as they didn’t sell – they come out even. They might think they are richer because their asset now costs $2, but this is a delusion: it is the same asset. They have just survived the inflation, nothing more. If, however, they were one of the early vendors who sold for $1 or $1.50, now they cannot afford to buy back the asset they previously sold. They are ‘priced out’ and poorer.

Meanwhile, Mr. King has done extremely well. He benefits, of course, as the recipient of a load of newly created money. But he was also able to buy assets for $1 and $1.50, before they rose in price to reflect the new money in circulation, so, with his assets now valued at $2, he profits from the asset-price inflation too. Wealth, which was originally spread evenly through our tiny economy, has insidiously transferred from cash-holders and those who sold their assets early to Mr. King.

As a consequence of this process not only has wealth transferred, but those operating in our tiny economy no longer focus on making things. Instead they look for signs of future money creation and speculate on those signs, because there is more money to be made that way.

There we have the dynamic of Western economies over the last 40 years. (1308-1330)

In summary, debt finance devalues the money that ordinary people earn whilst, at the same time, the ever-expanding state robs us through taxation. This all results in increasing inequality, contra the state’s claim to enforce equality. As long as governments have a monopoly on the currency this situation will continue. Which brings us neatly on to Frisby’s recently published Bitcoin: The Future of Money?

I first became aware of Dominic Frisby when searching on Amazon for an introduction to Bitcoin. Frisby’s book was rated very highly and looked more interesting than the other offerings. I was dimly aware that Bitcoin was potentially an important innovation, but I wanted to understand it from a socio-political perspective as well as from a techno-economic one. Frisby’s book delivers on all counts.

Frisby begins by offering a lucid explanation of what Bitcoin is and how it works. I shan’t attempt to summarize it here; buy the book and read it for yourself. He also gives a fascinating account of the cypherpunk milieu from which Bitcoin emerged. All of this was totally new to me, and it’s fascinating stuff.  Perhaps the most important innovation to come from these anarchistic coders was the notion of publicly verifying a transaction that a computer has been involved in. The transaction is completed when a computer solves a complex mathematical puzzle. The completed transaction is then sent to the network and is verified when the network agrees that it has been solved correctly. This system was the basis for Bitcoin’s block chain. The beauty of this system is that it requires no central authority to maintain the integrity of the exchanges that take place within it. It is a distributed, decentralized system that self-regulates. Because it does not rely on trust in a government or central bank it is known as a trustless system. Frisby’s chapter on this “anarchic computing subculture” is an extraordinary example of how power structures can be challenged with little more than determination and a very good idea.

There is also a chapter on Bitcoin’s pseudonymous creator, Satoshi Nakamoto. I had assumed that this character was the elderly Japanese gentleman (Dorian Nakamoto) who appeared in news reports around the world when he was “outed.” Frisby thinks not, and he makes a compelling case that Nakamoto is actually one Nick Szabo, a cypherpunk and polymath of some genius. As all of this is new to me I can’t really comment on the plausibility of Frisby’s assertion beyond noting that many other people who know far more than me seem to agree with him. In any case, Szabo is an interesting enough fellow in his own right. His paper on the origins of money [7] is worth checking out, as is his website [8].

Another interesting development that takes Bitcoin’s technology one step further is Ethereum. Ethereum is built on the block chain foundation, but it is specifically designed to be open-ended in its application. It can operate as a digital currency, like Bitcoin, but it can also be used for social networks, email, financial markets, or anything else. Effectively, it seems to be offering a new form of internet built on a distributed network, rather than central servers. This has important implications for anonymity on the web as well as for the resilience of web-based services. The absence of central servers would make it almost impossible for governments to monitor or remove content from the web. Email communications would take place between the sender and the receiver(s) with no intermediary party. This makes such communication secure as it cannot be intercepted in transit. Thus Ethereum, building on the block chain technology of Bitcoin, offers the possibility of anonymous and secure web usage. Some people think that Ethereum (or something like it) will herald a new type of World Wide Web, already being referred to as Web 3.0. No wonder governments aren’t crazy about these innovations. In this context, Frisby is right to say, “The revolution will not be televised. It will be time-stamped on the block chain.” (2668)

One of the implications of Bitcoin is in the free movement of capital around the globe. Frisby comments, “The implications of this possibility to instantly transfer wealth or ownership across borders without interference are, I think, considerable. It means borders would lose much of their significance.” (2187) This statement probably goes to the heart of the problem many people will have with Frisby’s brand of anarcho-capitalism. It brings to mind a world in which people move freely, without any concern for national identities, but at the behest of the investment projects of multinational corporations. It sounds like our world but worse.

But is this a fair interpretation? I think not, for two principle reasons. Firstly, mass immigration is hugely incentivized by the welfare provisions (including healthcare) that all Western countries offer. If the state was dramatically reduced in scope then those countries would immediately be less appealing than they are now. Unless there was a surplus of jobs then immigrants would often be worse off moving to a new country than staying put. Secondly, if Bitcoin (or some other cryptocurrency) lives up to its potential and rings the death knell for debt based finance then this is likely to minimize the opportunity for rapacious, exploitative movements of capital. There would have to be a global rebalancing of the books as the opportunity to make vast amounts of money very quickly through speculation would diminish. In a strange irony, complete free market capitalism would be more stable and settled. Given a genuinely free choice most people will choose home.

Of course, many people will disagree with my interpretation, but it is undoubtedly the case that history is moving in the direction that Frisby foresees. I see this as an opportunity rather than a threat. More freedom can only be a good thing. The danger for us is that if we remain too enamored of options that rely on heavy state intervention, such as a minimum wage, or high taxation, we will be offering 20th-century solutions to 21st-century problems.

Frisby covers a great deal more than I have touched on in this review and it is all food for thought. Although he favors a complete dismantling of the state he is aware that this is unlikely to happen in toto any time soon, and he offers a number of imaginative suggestions based on a vast reduction in state power. It is not necessary to be a capitalist or an anarchist to recognize that Frisby’s voice is an interesting and radical one.

Both books are well worth reading but if you only want to try one then go for Bitcoin: The Future of Money? As well as providing a lucid and extensive introduction to the subject it also contains a chapter summarizing much of the material contained in the earlier book. Both are also available as ebooks at a very reasonable price.