Economists have written on the mechanics of a Bitcoin-like currency, in essence, a fixed-supply alternative anonymous fiat "currency". The conclusion is that it will not be fulfilling its anarchist ideological aspirations by unseating the dollar. But it may have a place as an electronic equivalent of cash with appeal for illicit (read: extra-state) transactions.

My dismay with the Bitcoin discussion, as an economist, has been the level of confidence everyone comes with. Whether it is dismissing the last century of economics off-hand or arguing one position in a rich debate with dogmatic passion, it is difficult to have an informed conversation. This comes from both sides, e.g. deflation is good for a currency versus deflation causes a deflationary spiral, both highly contentious statements at best, comes up in every HN bitcoin discussion.

You need to go back to papers written by F.A Hayek criticizing Keynes in the 30s to get any serious academic discussion of the benefits of a fixed money supply. His critique of Keynes' idea of the "Paradox of Savings" is good, also the later paper he wrote: "The Denationalization of Money", which explores privately issued competing currencies is pretty interesting.

Note that a lot of Bitcoin enthusiasts plough through Keynes to the value of debt. This, on the other hand, was answered by the Battle of Waterloo, where the City of London financed British army beat the initially superior French.

"If it were possible, as has been repeatedly asserted in recent English literature,[114] to keep the total amount of bank deposits entirely stable, that would constitute the only means of getting rid of cyclical fluctuations. This seems to us purely utopian. It would necessitate the complete abolition of all bank money — i.e., notes and checks — and the reduction of the banks to the role of brokers, trading in savings. But even if we assume the fundamental possibility of this state of things, it remains very questionable whether many would wish to put it into effect if they were clear about its consequences. The stability of the economic system would be obtained at the price of curbing economic progress. The rate of interest would be constantly above the level maintained under the existing system (for, generally speaking, even in times of depression some extension of credit takes place).[115] The utilization of new inventions and the "realization of new combinations" would be made more difficult, and thus there would disappear a psychological incentive towards progress, whose importance cannot be judged on purely economic grounds. It is no exaggeration to say that not only would it be impossible to put such a scheme into practice in the present state of economic enlightenment of the public, but even its theoretical justification would be doubtful."

He's basically apologizing for finding all these flaws in the monetary system and central banking. He was convinced, at least at this point in his life that he could reason with the financial system to resolve these issues through better understanding. That's the interesting thing about Hayek. He was not opposed to the structure of the financial system out of ideological conviction but just that he had enormous insight into the dynamics of the system and stated his understanding without editing or simply repeating the conventional wisdom.

  We're not getting a lot of economists writing on Bitcoin.

Postscript:

Computer science has delivered the goods in a way that economics just hasn't, as even Krugman admits[1]:

  ...the widely accepted proposition that events like those 
  of the 1930s could never happen again. But even pessimists 
  like me, even those who realized that the age of bank runs 
  and liquidity traps was not yet over, failed to realize how 
  bad a crisis was waiting to happen... 

  What you can criticize economists for – and indeed, what I 
  sometimes berate myself for – is failing even to see that 
  something like this crisis was a fairly likely event.

  My view is that improvements in monetary policy, though 
  certainly not the only factor, have probably been an 
  important source of the Great Moderation. In particular, I 
  am not convinced that the decline in macroeconomic 
  volatility of the past two decades was primarily the result 
  of good luck, as some have argued, though I am sure good 
  luck had its part to play as well.

[1] http://krugman.blogs.nytimes.com/2012/03/05/economics-in-the...

[2] http://www.federalreserve.gov/boarddocs/speeches/2004/200402...

And those experts were at least operating profitable legacy businesses, so had _some_ empirical proof of their claims (to wit: their products worked, even if not as well as the Valley's).

Now, lo and behold, we have a direct test of open source software vs. Krugmanesque proclamations. Krugman is simply not qualified to evaluate Bitcoin. You think he knows SHA-256 from a hole in the ground? He'll say it won't work just like legacy payment providers thought Paypal wouldn't work. And then he'll start advocating that it be prosecuted once it does threaten him, and then he will lose.

If someone can reliably predict macroeconomic trends and manage risk, what's their excuse for not being filthy rich? If they're not rich, I don't trust their tallent. If they are rich, I trust they won't give away their secret formula.

We have politicians who have misunderstand and politicise economics. Similar to how evolution is somehow now a liberal theory.

New Keynesian economics is not liberal or conservative. It says, in hyper-simplified form, save (conservative) in good times, and spend (liberal) in bad. Right-wing Central Europe is one of the few in recent memory to have implemented both legs. Politically conservative trade theory, about which there is consensus amongst economists, earned left-wing Paul Krugman his Nobel Prize.

Myth of the Rational Voter [1] explores issues economists have put to rest but the public refuses to accept there is consensus on. Similar to how the masses insist on perceiving "hackers".

[1] http://www.amazon.com/Myth-Rational-Voter-Democracies-Polici...

As for seasteading, there have been plenty of experiments testing the theory that a tiny nation can become very rich from being a laxly-regulated, tax-free place for rich foreigners to park money. It works very well until you try to generalise the results to larger economies and end up like a certain Mediterranean tax haven with a non-state currency...

The trouble with dismissing the knowledge accumulated by those whose experiments failed is the risk of being condemned to repeat them...

Besides, your comment basically says that you don't have data to support your position, but you have a hunch, so we should just trust you on this.

Now today the question is whether the "mixed economy" which allows unlimited state intervention (which does indeed lead to Cyprus) is better than fettered government and unfettered capitalism. We're going to find out.

Please don't destroy discussions.

He also suggests that people outside the field are making better contributions, but I haven't gotten to the part in the book where he argues that in detail.

Compare y2k to 2008 banking crisis?

2008 banking crisis: terrible things happened even with (or because of) the intervention of economists.

I'd say that computer science has shown similar failures when dealing with phenomena that are as large-scale and chaotic as economics. Artificial intelligence is one such area in which it has been difficult to produce results.

Using the word "system" as broadly as you have in this post seems like a recipe for shaky reasoning.

I'm not sure this is a fair criticism because literally every non-governmental currency would suffer from this problem at first. There is nothing inherent to bitcoin that precludes it being easy to convert to or being widely accepted. In fact, there are qualities inherent to bitcoin that make it easy to convert to and to be widely accepted. The problem is that there is no appropriate frame of reference for these qualities because there have been so few digital currencies in the history of the world.

A fairer assessment might be that bitcoin is a fairly bad currency at the moment but has the potential to be a pretty great currency. The same is not true for the Zimbabwean dollar.

I agree, however, that currency speculation is currently the biggest problem facing bitcoin (by far).

There's no such thing as fair criticism here. If it's a valid critique that any non-governmental currency would share then chalk up a win for governmental currencies.

The main thing is that since hundreds of millions of people use the USD and you can use it to buy many goods and services, it's difficult to sway the opinions of a large chunk of the population that use it so any change in value will be slow. Bitcoin on the other hand has a much smaller user base so its volatility is much larger.

If this ceases to be a credible threat, it's actually quite amazing to me how quickly a government's currency can become nothing but so much paper, which argues strongly against the idea that the value is arbitrary.

This means that the amount of money can fluctuate to accomodate demand at a fixed interest rate, and it does so automatically, in a decentralized way, as part of the regular operation of the system, without any government intervention. This is why it is called endogenous.

Now, there are the goldbugs who think a fixed money supply is somehow morally superior. But my understanding is that experiments with controlling the money supply exogenously in the past, i.e. where the central bank set a fixed size of the money supply as target and tried to enforce that, resulted in a wildly volatile interest rate - simply because the demand for money is volatile, and by fixing the size of the money supply, something else had to budge.

For businesses, a volatile interest rate is bad because it makes planning difficult. This is why central banks now target a fixed interest rate (with volatile, endogenous money supply) - it simply is better for the economy.

Aside from the crazy waste of energy, this is probably the most important argument against basing the economy on Bitcoin.

Right, but ultimately thats just a confidence judgement. The 'credit worthniess of a nation' is just a consensus judgement by the markets. Hence Money is based on confidence and consensus. With most currencies that fact is hidden away, but with Bitcoin its just made more explicit.

I'm pretty sure the US govt is here to stay, though.