As I write this, there are 12,130,075 bitcoins in existence[1]. Over the coming year, approximately 1,314,000 bitcoins will be "minted" (25 new bitcoins every ten minutes). If Bitcoin were a real currency, that would equate to an inflation rate in excess of 10%. So, in effect, every bitcoin owner would be paying 10% of their Bitcoin wealth for "free" payments, whether or not they actually make/receive any payments or not.
However, to be useful, while bitcoin can replace some of parts of this, there is still the need to be able to enforce contracts made using bitcoin, so a bitcoin economy would need to reuse much of that infrastructure.
Besides, it's not particularly relevant, because for most people, escaping the costs of the infrastructure that creates trust in our fiat economy is not practical, while escaping the costs of the infrastructure that creates trust in bitcoin is trivial - just don't use it.
<One thing I haven’t seen emphasized, however, is the extent to which the whole concept of having to “mine” Bitcoins by expending real resources amounts to a drastic retrogression — a retrogression that Adam Smith would have scorned.>
This he calls out as completely misplaced:
How much does the existing banking/payment infrastructure cost? One reasonable measure are the fees charged. Standard online payment fees are 2.5%, not including the added costs fraud (chargebacks plus transactions blocked out of fear of fraud).
And he's right. but The real cost of running a market is not, however a bid-ask spread. And he gets at the point, but its not clear, here:
Bitcoin payment fees are close to zero and fraud is impossible since Bitcoin is a bearer instrument.
The [true costs] of running a market are thos that instill [trust] in the market system. That is, what is commonly called "transaction costs" in economics. But these are not literal costs, which tend to be rent-extraction wherein the transaction is merely instrumental to effect a scaling biz model.[1] The true transaction cost of "effective honesty" are to be found in "governance costs", that is...the cost of lawyers. And thus more generally, and indirectly, the primary purpose of government (eg schooling, police, courts, national defense). So, it is worth putting in context the "cost" of mining bitcoins here. The "innovation" that is provided is provided also at this seperate level of abstraction, far away from the "overhead" style transaction costs in a literal definition. And to the authors point, these are both measurable and large; such an innovation thus actualy saves wated resources that would otherwise be deployed (think of all the energy spent on anti-spam and anti fraud by CCs...that 2.X is ~mostly profits tho).
In any event, interesting topic and interesting post. And I think he intuits the right answer, but the exact words put forth sort of murky the point abit, IMHO.
[1] eg 7% of an IPO to a Bank, X% to your real estate broker, 1/8 of a point in a pre-decimalized stock market, 2.x% on a credit or paypal transaction.).