Fiat money leads to a degradation of incentives, creating a society motivated only by the consumption of resources and zero value production.
This is an opinion editorial by Jimmy Song, a Bitcoin developer, educator and entrepreneur and programmer with over 20 years of experience.
We want nice things. We want to live in a nice house, eat good food and have fulfilling relationships. We want to travel to exotic places, listen to great music and experience fun. We want to build something that lasts, achieve something great and leave a better world for tomorrow.
These are all part of being human, of participating in society and of progressing humanity. Unfortunately, all these things and more get ruined by fiat money. We want nice things, but we can't have them, and the reason is because of fiat money.
Governments want the power to decree prosperity, fulfillment and progress into existence. They're like the alchemists of yesteryear, who wanted to turn lead into gold through some formula. Actually — they're worse. They're like a five-year-old that thinks by wishing hard enough, that she can fly.
Being the delusional power-drunk politicians that they are, the elites think that by decreeing something to be so, it magically happens. That's indeed where the word "fiat" comes from. The word literally means "Let there be," — in Latin and in English, it's become an adjective to describe creation by decree. This can be most easily seen in Genesis 1:3 in Latin. The phrase there is "fiat lux" which means "let there be light."
Of course, creation by decree doesn't quite work like it does in Genesis. If you want a building, you can't just say, "Let there be a building." Someone has to dig, pour a foundation, add framing, etc. Decrees don't really do anything without capital and labor. In the absence of the market forces of supply and demand, decrees require people and resources to be enlisted. In other words, as much as governments would love for reality to be different, a decree by itself doesn't really do anything. By itself, a decree is about as useless as an old man yelling at the sun. There has to be some coercion involved to fulfill the decree. Fiat decrees are a euphemism for using force and violence.
For buildings, it's obvious that creation by decree doesn't do anything. Yet for money, decreeing it into existence seems legit, maybe even compassionate. Keynesian economists see fiat money as something that by itself does something. Of course, they're wrong and no amount of calling it "debt we owe to ourselves," changes the fact that it's theft. That's about as honest as Enron's accounting.
The deviousness of fiat money is that it makes government violence look like a market process. Fiat money printing steals from the other holders of the currency and pays people to do the government's bidding. That theft is hidden and combined with a good dose of Keynesian propaganda, which makes fiat money seem innocuous, perhaps even benevolent.
In a sense, fiat money is less violent than other forms of fiat rule. But that's like saying mobsters that give you a chance to pay them off are less violent than street thugs.
Dictators use obvious violence to compel their citizens to fulfill the desires of the dictator. Forced conscription, war and poverty are common in these societies, and theirs is a miserable existence with little human freedom to speak of. Fiat rule is terrible for humanity as can be clearly seen in how backwards the Soviet Union was or how backwards North Korea is now. Progress is very hard in a society built on slave labor.
Fiat money, by contrast, at least looks voluntary. Yet in many ways, it's still very harmful to civilization. Fiat money is more like organized crime, which makes everything seem voluntary.
Fiat Money Ruins Incentives
Fiat money ruins many market incentives. The reason is because there's a special buyer in the market that has much less price sensitivity. That buyer, of course, is the fiat money creator. They can and do print money for all sorts of reasons — some benevolent (welfare for the poor), others not (military buildup). They spend like drunken sailors who just found pirate treasure.
The problem with a buyer like the government is that someone always sits in the middle. It's not the "government" per se, that actually buys a fighter jet or an office building. There's always someone that acts as an agent of the government that does this buying. The agent works on behalf of the government to procure various goods and services and the government entrusts the agent with the authority to spend on its behalf.
Unfortunately, this arrangement is ripe for abuse. The agents are essentially spending other peoples' money for other peoples' gain, so they aren't incentivized to trade very efficiently. Their incentives are as skewed as the Leaning Tower of Pisa.
When we are buying and selling in the market with our own money for our own benefit, we do complicated economic analyses to figure out whether we'll benefit enough from the good or service to be willing to part with our money. Thus, we'll be price sensitive and attempt to get the most value for the money we pay.
For a government bureaucrat that's in charge of procurement, however, getting value for the money is not their priority. They are incentivized to spend in a way that's for their own benefit and not the governments'. This doesn't have to be in obvious ways as with bribes. They can spend much less time examining the goods and services, or buy from people that they like. The result is generally a bad trade where the agent gets some small benefit at a much larger expense to the government. In a sound money economy, the government would fire such people — but in a fiat money economy, the government doesn't care as much since money is abundant and they're not price-sensitive. You can do that when there's a cookie jar that you can always steal from.
So in the final math, the agent benefits at the expense of everyone else. These people are what we call rent seekers. They don't add any benefit but still get paid. And it's not just government bureaucrats. If you are an investment banker that takes extremely leveraged bets, you are a rent seeker, too. Generally, they get to keep the profits when their investments win, but get bailed out when their investments lose. They, too, don't add anything and leech off of society. What's worse, these are supposed to be some of the most talented and driven people in society. Instead of building things that would benefit civilization, they're engaged in grand larceny! Of course, they're not the only ones guilty of rent-seeking theft. Sadly, most jobs in a fiat money society have a huge rent-seeking component.
One rule of thumb that we'll get to later in this article about how to tell if something is rent seeking is by seeing how much of the job is political and not value-adding. The more politics involved, the more rent seeking there generally is.
Rent-seeking jobs cheat the system and when people have the incentive to cheat, many will. You only need to look at online gaming to know that. Cheating is attractive because it's a lot easier than doing hard work and if the cheating is normalized, as it is today, there's little moral impediment. We've all become that soccer player that pretends to be in pain to influence the referee.
Rent seeking is understandable since creating a good or service that the market wants is not only hard, but it's very fickle. What you produce today is an innovation away from becoming obsolete. Rent-seeking positions, even with less compensation, are nevertheless more desirable because of their certainty. Is it any wonder that rent-seeking positions are so sought after?
Think about how many people want to become investment bankers, venture capitalists or politicians. They're way more profitable than providing a good or service, require way less effort and have lots more certainty.
Fiat money incentives are more broke than Sam Bankman-Fried.
Fiat Money Ruins Meritocracy
The existence of so many rent-seeking positions means that a large part of the economy does not run on normal supply-demand market forces. Even the possibility of rent seeking means that goods and services need to account for a tilting of the playing field. Fiat money ruins meritocracy.
In a normal market system, the best products win. Not the most politically-connected products. Not the products that employ the most people. The best products win because they satisfy the needs and wants of more people. Fiat money changes the equation by adding politics.
When the government can print money, the people that benefit the most are the people that get access to that money first. This is called the Cantillon Effect and it's the reason why rich people get richer without adding much, if anything. So how does the government determine who gets access to the money? As with everything government related, decisions on who gets what money is determined through politics. And when the money printer is political, everything else becomes political. Politics is a cancer that spreads through the entire market.
The "haves" in a fiat money economy tend to be the ones that are good political players. They know how to get newly printed money directed toward them and they have a large advantage over those that don't. Politically savvy companies will do better than the non-politically savvy companies that make better products. Thus, surviving companies in a fiat money economy are very politically savvy. It's no wonder so many companies seem to be led by politicians rather than entrepreneurs, especially as these companies age.
Thus, politically savvy incumbents have a tremendous advantage in a fiat money economy. They will saddle newcomers with regulatory costs and get subsidized by newly printed money, ossifying their position. The marketplace will be filled with older, worse goods and newer, better goods will never come to market given these unfair advantages. The incumbents get to play CalvinBall and change the rules whenever they're losing.
Labor unions, zombie companies and old politicians are all indicators that institutions last way beyond their usefulness to society. They all use political means to make up for their lack in fulfilling market desires. The decrepit and the dying never die to make room for the innovative. Politics stifles entrepreneurialism and creativity. It is a cancer that destroys the good cells that keep the body alive.
Merit, in other words, has been overtaken by politics everywhere.
Fiat Money Ruins Progress
The ubiquity of politics over merit means that it's become harder than ever for civilization to improve. Better stuff doesn't necessarily win and markets tilt toward the political. Fiat money protects the existing politically connected players against the newer, more dynamic players from gaining market share.
Hence, fiat money ruins progress. Civilization ossifies because the incumbent players have way more power to stop new players. The incumbents often will put up huge regulatory moats, under-price newer competitors through fiat subsidization, hire away the best employees with fiat money or as a last gasp, just buy out the new players altogether. All of these strategies work through access to newly printed money. The zombies survive by eating brains.
We should have nuclear powered everything right now, but that technology is completely stifled by regulation. Government can enforce this mandate through fiat money. Oil, natural gas and coal continue to dominate because we don't make scientific progress on other ways to provide better energy. Technologies like wind and solar get government backing because they're politically popular, despite their clear inferiority in variance, energy density and portability. We're going backwards in energy.
The Luddites win in a fiat monetary system because fiat money and political considerations essentially force everything to stay the same. It's profoundly conservative in that the old and decrepit are saved at the expense of the new and meritorious. If that sounds familiar, it should. That's the exact math that was used to justify the lockdowns of the past few years.
We can see this dynamic in the airline industry. The time to travel from New York to London is worse now than it was 50 years ago. We can also see this dynamic in dishwashers. A dishwasher 50 years ago could clean a full load in under one hour. It now takes more than 3 hours. Regulations protect incumbents and put politics as a priority over merit. The result is that civilization doesn't progress.
Instead, fiat money has regressed civilization. The nuclear engineers of yesteryear are working on React.js apps and scammy Web3 products because that's where the money is. The inventors of yesteryear are investment bankers creating high-frequency trading systems. The incentives are broken — merit is no longer a consideration, so is it any wonder we're regressing as a civilization?
We peaked as a civilization in 1969 when we landed a man on the moon. Everything since then hasn't pushed humanity forward, but turned it inward. At best, it's preserved what we already have. At worst, it's destroying humanity's progress.
What's worse, all this rent seeking has inflamed the entitlement mindset. Having good political connections, these rent seekers think they are entitled to these negative-sum positions. Nothing is more toxic to progress than people whose incentives are to keep things from getting better. Fiat money changes productive people into entitled brats.
Fiat Money Is Profoundly Conservative
Bad incentives are at the core of fiat money. If you can steal instead of work, most people will steal — and they can, through politics. Politics, unfortunately, is a negative-sum game and that means regression for civilization. Like war, politics is about consuming accumulated capital.
Fiat money redistributes wealth so that the incumbents can stick around. There's little room for new ideas or new goods or new products because the incumbents have so much political clout.
Indeed, we've reached a tipping point where there's more rent seekers than there are productive people creating stuff. How many people work email jobs? How many people even work? Way too many people are happy with an XBox, a mattress and pizza delivery. Do these people benefit society in any way? It's no wonder so many people are so depressed.
The politicization and zombification of the economy has had real consequences in how society functions. Building codes make new forms of housing very difficult to build. Airline regulations make new designs completely illegal. Nuclear regulations make different, more efficient forms of energy really expensive.
Ancient industries, companies long past their expiration date suck productivity out of the economy. They provide little value, but continue getting subsidized through fiat money. Industries like oil, trains, airlines and cars have all become zombies and are protected from extinction through fiat money. Heck, even some electronics producers, and software companies, which are relatively new to the economy, are zombies at this point. The zombies are winning.
And the zombification is accelerating. Facebook probably transitioned from producer to rent seeker much more quickly, than, say, IBM.
Sadly, this is the reality of fiat money. The producers at a certain point turn into rent seekers as they politicize. The zombies soon start outnumbering the normal people and everything goes downhill.
Bitcoin Fixes This
The good news is that Bitcoin fixes these incentives. Removing fiat money means the normal market process of supply and demand and prices can work. Politics takes much less of a role and the zombification of the economy reverses. Civilization can progress again. Bitcoin is the antidote and the great hope for reversing the decline.
Unfortunately, we have about 100 years of rot to clear out and that's going to take some time. The people most embedded in the current system, the Cantillon winners, such as Ivy League business school graduates, rich old people and bureaucrats of all types, are the least likely to convert to Bitcoin and will fight tooth and nail to preserve their positions. These people are not going away quietly and you can already see that they're making their own bid to further zombify with CBDCs.
Thankfully, Bitcoin has the advantage of time on its side. The Cantillon losers, such as young people, citizens of developing countries and actual producers of goods and services will inevitably turn toward the much fairer system in Bitcoin. The zombies will be consuming themselves.
Welcome to the revolution. Now go save civilization.
This is a guest post by Jimmy Song. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
via bitcoinmagazine.com
