Bitcoin’s Economic Revolution: How the Digital Currency is Challenging Keynesianism and Reshaping Our Financial World

Throughout history, certain technologies have fundamentally altered how we perceive the world. Think about the advent of computers in the 20th century, which forced us to recognize the computable nature of reality. Or consider the steam engine in the 18th century, which spurred a deep dive into the mechanics of work and heat. These weren’t just gadgets; they were paradigm shifters.

Is Bitcoin the Next Paradigm Shifter in Economics?

Now, fast forward to today, and we have Bitcoin. It might sound bold, but Bitcoin is poised to have a similar transformative effect on our understanding of economics. How so? Let’s dive in.

For years, many economic schools of thought have operated under certain assumptions – some even claiming that stateless money is simply impossible. Others argue that creating new money ‘out of thin air’ is actually beneficial for the economy. But Bitcoin throws a wrench into these established ideas.

To truly grasp Bitcoin, you need to grapple with the fundamental nature of money and its role in the economic machine. The rise of Bitcoin (BTC) isn’t just about a new digital currency; it’s about a potential paradigm shift in humanity’s economic knowledge.

Challenging Keynesian Economics: Bitcoin’s Unwavering Supply

Let’s talk about Keynesianism. This macroeconomic theory, pioneered by John Maynard Keynes in the early 20th century, gained prominence after the devastating 1929 stock market crash. Keynes believed that free market capitalism wasn’t equipped to prevent economic catastrophes. His revolutionary idea? Demand, not supply, is the real engine of economic growth.

Keynes argued that aggregate demand dictates supply. Essentially, total spending in an economy determines both how much is produced and how many people are employed. His prescription was clear: governments can stimulate economic recovery by boosting demand. How? Through increased deficit spending or by lowering interest rates.

While Keynesian economics has its proponents, Bitcoin presents a fascinating challenge to its core tenets, particularly the idea that demand drives supply.

In the world of science, a single contradictory example can dismantle a hypothesis. Bitcoin might just be that example for Keynesian economics.

Here’s the kicker: Bitcoin’s supply isn’t dictated by demand. Unlike fiat currencies, the total number of Bitcoins is predetermined by mathematical code. Every ten minutes, a new block gets added to Bitcoin’s blockchain, and with each block, a fixed number of Bitcoins are released into circulation.

This release is called the ‘block reward,’ and it halves approximately every four years (every 210,000 blocks). Currently, the reward is 6.25 BTC. The next ‘halving’ is expected around March 18, 2024, which will reduce the reward to 3.125 BTC per block. This halving cycle will continue until the total supply reaches 21 million Bitcoins.

The crucial point? No matter how high the demand for Bitcoin soars, this predetermined supply schedule remains unchanged. It’s a loop running independently of market sentiment.

Why Keynesians Like Paul Krugman Might Be Wary of Bitcoin

It’s no surprise then that prominent Keynesian economists, like Paul Krugman, have been critical of crypto, often singling out Bitcoin. Krugman has famously described crypto (and by extension, Bitcoin) as having “no backstop, no connection to reality,” and appealing to a “dream of self-sufficient individualism… unspoiled by institutions like governments or banks.”

From a Keynesian perspective, this opposition is understandable. Bitcoin’s success directly challenges their entire economic framework. Moreover, Bitcoin complicates the implementation of Keynesian policy prescriptions. Governments can’t simply ‘create’ more Bitcoin to inject liquidity into the market when needed. In essence, Bitcoin poses a fundamental challenge to the Keynesian way of doing things.

MMT: Another Theory Facing Bitcoin’s Reality Check

Modern Monetary Theory (MMT) can be viewed as a more contemporary evolution of Keynesianism. MMT has gained traction, especially as governments worldwide justified increased spending during the COVID-19 pandemic.

MMT’s central tenet is that a government that issues its own sovereign currency and doesn’t peg its value to another currency faces no financial limits on its spending. In today’s political landscape, this essentially suggests that the United States, for example, has unlimited capacity to print money.

But again, Bitcoin throws a wrench into the works. A Bitcoin standard would render this unlimited money printing impossible. Advocating for MMT in a Bitcoin-dominant world would start to sound as outdated as flat-earthers claiming we can’t sail around the globe.

Beyond Specific Theories: Bitcoin’s Broader Economic Implications

Even beyond specific economic theories like Keynesianism and MMT, Bitcoin challenges a universally accepted notion: that governments must control the money supply. As Bitcoin’s popularity grows, its very existence becomes a critique of this concept.

This clash between established economic thinking and Bitcoin’s reality is causing cognitive dissonance for many. But as Bitcoin continues its trajectory toward potentially becoming a global reserve asset, it will chip away at these outdated economic assumptions, one person at a time.

The Ripple Effect: From Bitcoin to Broader Economic Re-evaluation

For many, this journey won’t stop at just money. Once people realize they might have been wrong about the necessity of government-controlled money, they might start questioning other long-held beliefs. “If I was wrong about money,” they might wonder, “what else have I been wrong about? Is government control truly essential for healthcare, charity, or even the justice system?”

This newfound questioning can lead individuals to seek out alternative economic perspectives that align with their evolving understanding.

They’ll become less receptive to what they might now perceive as propaganda – narratives pushed by those with vested interests in maintaining the status quo of government-controlled finance.

Enter Austrian Economics: A New Lens for a Bitcoin World

For many, this intellectual journey leads them to Austrian economics. This school of thought focuses on how individuals act purposefully in a world of limited resources. They might encounter Mises’ Regression Theorem, which elegantly explains how money can emerge organically, without top-down government control.

Before Bitcoin, such an idea might have seemed laughable. But with Bitcoin demonstrating the viability of stateless money, the Regression Theorem and similar concepts gain new credibility.

And the exploration doesn’t end there. If stateless money is possible, what about other economic phenomena? Austrian economics also offers insights into how prices are formed, arguing they aren’t arbitrary. Price increases during times of high demand, for example, aren’t necessarily ‘price gouging’ but a natural market response.

Similarly, Austrian economics challenges the notion that corporations are inherently greedy. In a free market, businesses profit by providing goods and services that people actually want to buy.

Even interest rates, according to this perspective, are not random. They are the cost of borrowing money, influenced by market forces. And this leads to a profound insight: artificial interest rate manipulation by governments, often intended to prevent recessions, might actually be the root cause of boom-and-bust cycles.

From this viewpoint, government intervention in interest rates, championed by Keynesians, might inadvertently create the very conditions for economic downturns, rather than preventing them.

Bitcoin: An Economic Teacher Leading the Way

This kind of economic awakening is happening daily, around the globe. Bitcoin is more than just a secure, global digital asset. It’s an economic educator, guiding us away from what some might call the ‘Keynesian Dark Ages’ and towards a potential ‘Austrian Golden Age’ of economic understanding.

Bitcoin is not just changing finance; it’s changing minds and potentially reshaping our entire economic worldview.