http://alethes.net/ Notes Alethes.net Bitcoin and the fallacy of money Jose Maanmieli A careless boy has broken the baker's shop window. The baker is angry. Now he will need to spend his hard-earned money on replacing the window rather than buying himself a new pair of shoes. The glazier, however, is happy. We intuitively understand that this (presumed) accident in which value has been destroyed is an economic loss. But the fallacy of the broken window concerns the belief that it is still good for ‘the economy’ that the glazier gets paid. Why do people believe this? Does it relate to the nature of money and society? The fallacy of money In Bastiat’s parable, the baker just happens to have some money, supposedly because he has produced and sold something like bread. If the window had remained intact, the overall wealth of the world could have increased by a pair of shoes, as the baker could have used the same money to order them from the shoemaker. This opportunity cost is Bastiat’s economic and logical argument, in a context where money seems scarce and difficult to obtain, like bread, shoes and window repairs. Of course, most of the time money appears to be precious like this. However, imagine that it was the ba(n)ker himself who created what we call ‘money’ these days, essentially, a symbolic token that others accept in exchange for their goods and services. In this case, the baker has not added any real value to the world. He merely takes it from the glazier or the shoemaker and offers to give them bread afterwards in exchange for the token. If the window breaks, there is no real opportunity cost, as the baker can issue another token to buy himself those nice shoes. All he has to do is honour his promise of reciprocity by accepting the tokens as payment for bread. 1 Compare this to a situation in which the baker creates ‘commodity money’, such as barley that he stores in the shop. The baker invests his limited time and energy in producing a certain amount of barley first. So, when he offers it to the shoemaker, the shoemaker knows that the baker has made an economic decision akin to his own decision to make a new pair of shoes instead of something else. This means that if the window breaks, there is a real opportunity cost: the barley will go to 1 The ba(n)ker here issues an IOU that banks normally lend to others rather than spend directly. Because these IOUs can be backed by so-called assets, many theorists believe that banks do not create money out of nothing. However, these assets (cash or central bank records) provide no final settlement, unlike bread or barley. They are themselves IOUs in a social, normative context that theorists mistake for a natural context.