Bitcoin Is Venice: Client/Server Fiat Finance
Bitcoin offers a peer-to-peer solution to the client/server model that finance has gradually shifted toward in the 20th century.
This article is part of a series of adapted excerpts from “Bitcoin Is Venice” by Allen Farrington and Sacha Meyers, which is available for purchase on Bitcoin Magazine’s store now.
You can find the other articles in the series here.
Modern academic economics is beholden to mathematics so complex, so obscure, and so removed from the reality it purports to describe and explain that it is effectively impervious to satire.[i]
It is Poe’s law in departmental form. As investors, we, the authors, are professional capital markets participants. But in a past life, we were academically trained not in economics or finance, but in physical geography, environmental systems engineering, hydrology and water resources management, mathematics, philosophy, and computer science, across our various credentials. We believe this unusual combination of knowledge and experience gives us a worthwhile insight into why modern academic economics is such a comical disaster.
We think it is a vicious interplay of three factors, each as unfortunate as the last, each feeding and fed by the others. First: physics envy. This is well understood and is not an original insight. Second, a more specific, material effect of physics envy in this realm: It pushes academic economists to search for what can be measured and quantified, rather than what can or should be understood. Financial markets throw off torrents of data, particularly in recent decades with the advancement of computation and networked computers. Third, financial markets are positioned directly adjacent to the fiat spigot of artificial money. The metaphor may even be more accurate if expressed as financial markets being the spigot. There is no other channel by which counterfeit money can be or ever is pumped into society at large. That is to say, the authors are repentant Cantillonaires, although we really are doing our best to throw off this mantle and reposition ourselves in advance of a Bitcoin standard.
The relevance of this third point — spigot proximity — is simple: funding and power. In a sense, these are really the same thing in different guises. If there are billions and billions of dollars,[ii] siphoned primarily from middle-class savers none the wiser, sloshing around an industry that has grown ever more comfortable wielding covert political power, it makes eminent tactical sense for the industry to try to buy legitimacy from an unsuspecting civil society. And at what cost? Basis points, in the scheme of things? Basis points of basis points? Probably more iterations are required. Finance has become nationalized and nations have become financialized. This extractive dance leaves two symbiotic parasites thriving on whatever productive capital survives their ravaging. Tarek El-Diwany writes in the preface to the third edition of “The Problem With Interest,” published just after the global financial crisis:
“No industry other than the banking industry could have raised such huge sums of capital, loans and guarantees in a few short months. That these funds should have been provided with such little conditionality is incomprehensible unless one accepts that some of the most important decisions of government are in fact taken by the banking lobby. At the height of the crisis, one leading public official at a well-known bank remarked to me that ‘the bankers are in the bunker with the government.’ Meaningful change cannot be achieved in these circumstances and one is forced to conclude that the present establishment is incapable of reforming itself.”
What El-Diwany describes may seem circumstantial but is only a single, specific case — one of which he was personally aware and could knowledgeably comment on — of a general issue in no way British or contemporary. When Andrew Jackson refused to recharter the Bank of the United States on philosophical and ethical grounds essentially identical to those for which we advocate in “Bitcoin Is Venice,” and this series, the bank called in all its loans in order to create a recession. Jackson’s speech on the matter is as harrowing as it is instructive:
“The distress and alarm which pervaded and agitated the whole country when the Bank of the United States waged war upon the people in order to compel them to submit to its demands cannot yet be forgotten. The ruthless and unsparing temper with which whole cities and communities were oppressed, individuals impoverished and ruined, and a scene of cheerful prosperity suddenly changed into one of gloom and despondency ought to be indelibly impressed on the memory of the people of the United States.
“If such was its power in time of peace, what would it have been in a season of war, with an enemy at our doors? No nation but the freemen of the United States could have come out victorious from such a contest; yet, if you had no conquered, the government would have passed form the hands of the many to the few, and this organized money power, from its secret enclave, would have dictated the choice of your highest officials and compelled you to make peace or war, as best suited their own wishes.”
Besides literal political corruption, an obvious yet subtler way to buy legitimacy is to infiltrate the academy and astroturf the meme that “finance” is deeply scientific, needs to be conducted by a professional managerial elite and needs to be culturally and politically integrated with the institutions of science, engineering and mathematics. Further, it can even be infused with any self-important thinker of deep thoughts like poets and playwrights, too, if any are up for it or need a quick buck and if none of the regular “scientists” are available. By whatever sneakily propagandistic means necessary, finance must be obfuscated into a systemically important meta-institution to which no respectable person would object.[iii]
Spoiler alert: It is not. This is bullshit. Finance is simple, or at least it should be: You take capital from savers and pass it on to investment projects; you try not to lose it and you try to give back more. You don’t get paid a lot for this because it’s not hard. The end.
El-Diwany brashly but justly opens the preface to the second edition of “The Problem With Interest” with a brief discussion of premodern medical quackery such as leeches, lack of ventilation and urine soaking, before his segue to modern academic economics as follows:
“Orthodox views have often proved all-pervasive and wrong, even in the light of facts that state otherwise, established assumptions have an uncanny knack of surviving. It is my contention that such is the case in the field of Western economic debate today. Where once the student asked ‘does raising the interest rate reduce inflation?’ he now asks ‘by how much must we raise the interest rate in order to reduce inflation?’ These are the complacent assumptions of the new ‘consensus economics.’
“Many developing nations now reach for the medicines that consensus recommends. But treatments involving ‘shock therapy’ and IMF austerity packages are uncomfortably reminiscent of the remedies of the quacks: extreme in their side effects and of ambiguous benefit. Sometimes, there appears the assertion that things would be worse under any other economic regime, of course, the assertion is untenable because on can never relive the past to know the difference. Meanwhile, consensus economics extends its grasp, and society is increasingly coming to accept pollution, the business cycle, inflation and gross inequalities in wealth as the unavoidable facts of economic life.”
“The complacent assumptions of the new economic consensus” must be, and are, zealously and unrelentingly incepted into the public consciousness in order to obfuscate that finance has gradually shifted over the 20th century from what we might call a peer-to-peer model to a client/server model. We used to be allowed to learn by experiment by having a good old scrap with our financial competitors. Now we are told what is to be done by decree. Client/server models of any kind of social organization are typically objectionable on the basis of fragility, single points of failure, lack of feedback and simple unfairness: Who gets to be the server? Who guards the guards? Finance now has an aesthetically-minded design that patently doesn’t work, and what’s more, nobody seems to be bothered that it doesn’t work, as if working isn’t even the point. Pondering all this for any length of time leads one to realize it goes well beyond finance or economics and arrives at political and moral philosophy. El-Diwany would argue it is ultimately a question of religion, and we would be hard-pressed to disagree.
It is a special case of: Is this just? The answer is, of course, no, this is highly unjust, which is why its propagandistic obfuscation is an institutional imperative. Federal Reserve board member Jeremy Rudd recently mused along the same lines, slipping in as a footnote to his September 2021 paper, “Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?)”:
“I leave aside the deeper concern that the primary role of mainstream economics in our society is to provide an apologetics for a criminally oppressive, unsustainable, and unjust social order.”
There is unfathomable institutional power at risk over this being more widely and clearly understood. And while there is a decent case to be made that Bitcoin fixes this,[iv] our goal in writing “Bitcoin Is Venice” and this series is very simply to make this more widely and clearly understood, such that Bitcoin can fix things faster. As alluded to in the acknowledgements section, the most important meme in Bitcoin is — or certainly should be, we think — number of people go up. Bitcoin is software, a protocol, an app, a network, a language: We will get to all of this in due course. But arguably, most importantly, it is a community. None are sufficient but all are necessary. We need “number of people to go up,” and we hope we can contribute.
Bitcoin is peer to peer in every sense; it is so by design and it could not be any other way. As free and open source, it is peer-to-peer software; as consensus-driven software, it is a peer-to-peer protocol; as a censorship-resistant protocol, it is a peer-to-peer app; as a distributed app, it is a peer-to-peer network; as a communications network, it is a peer-to-peer language; and as a peaceful language, it is a peer-to-peer community.
The client/server fiat finance and monetary model is none of these things, cannot be any of these things and will never be any of these things. It is a closed-source, non-consensual, censorial, centralized, incomprehensible, violent system. It is unsurprising, therefore, that its system administrators would prefer to muddy the waters on how, exactly, it all works.
Our overall thesis can arguably be reduced to a handful of dichotomies contrasting approaches to the study of human action and the configuration of human relations in all their forms: design versus evolution, stasis versus dynamism, equilibrium versus process, modeling versus experimentation, trust versus verification, decree versus discovery and rationality versus heuristics. Modern academic economists may not think they are interested in how to price securities, but they are intensely interested in designing static equilibrium models, trusting this methodology, and decreeing all else to be irrational. Hence, whether they like it or not, modern academic economists have been seduced by the idea that the question of how to price securities can even be answered.
As for this extract and helpfully referring to the split just mentioned, there is an important point we want to stress that is implicit in much of “Bitcoin Is Venice”: Finance is utterly broken with or without Bitcoin. It has increasingly become a self-referential game that enriches only its participants by moving money yet destroying wealth. It is so desperately, irreparably broken that its insidious influence has infiltrated not just modern academic economics — as just claimed and as argued in later extracts — but, via the financialization of everything… everything. It is as much a cancer of the discourse as of the markets. A society in which barely literate, degenerate options traders spouting garbled charlatanic bullshit are revered as purveyors of ancient wisdom is surely broken and decadent by any sound assessment. The rare few financiers who are committed to the actually ancient and wise practice of taking capital from savers and passing it on to investment projects, trying not to lose it and trying to give back more, sadly suffer with the rest of us. And this assumes it is even possible to perform this role successfully in the first place. Often, it is not.
We ask the reader to remember that the theory only exists in the first place to retroactively justify the practice. Incidentally, this lends itself to autobiographical detail: This is how the authors first came to appreciate Bitcoin. Before we thought it might be possible that Bitcoin can finance, we knew that it was true that finance needed to be fixed.
A common criticism of Bitcoin, albeit naïve and superficial, is that it is a solution looking for a problem. This is what we aim to debunk. The problems are terrifyingly real, and for reasons we will explain in later extracts, many lead back to money — which is to say, to finance, in one way or another. In the client/server model of finance, they are one and the same thing. The reader is encouraged to keep in the back of their mind an aphorism beloved of Bitcoiners the world over, should the following at times seem a little too theoretical:
Fix the money, fix the world.
[i] By “modern academic economics,” throughout the series, we do not pretend our target is a monolithic school of thought but rather a patchwork of many. The historical development of each took its own path, but, today, none seem to disagree with one another on theoretical issues of substance. Also, any aspiring academic economist would do well to slot into at least one (ex-Bitcoin fixing this, of course). Rather than explain this every time, we will continue to say “modern academic economics,” (or if the mood takes us, “degenerate fiat economics”) by either of which we mean something like the following: In macroeconomics, the combination of general equilibrium theory is traced from Léon Walras’s contribution to the marginal revolution through Marshall and Robinson to Arrow and Debreu. Keynesianism, originating with Keynes obviously, but contemporarily and primarily as pseudo-mathematically bastardized by Hicks in the United Kingdom via Oxford and Cambridge and Samuelson in the United States via the Massachusetts Institute of Technology, and now deployed as, more or less, for all x, if x, then boost aggregate demand with central bank intervention; and Friedman’s monetarism; in microeconomics, the dominant “neoclassical” school, traceable from Walras and Jevons’s marginalism through Pareto, Pigou, Marshall, Hicks and Sraffa (among many others), and most recently repackaged and ossified in the overtly financial framing of the Chicago School. Behavioral economics is usually thrown in here and there to paper over obvious explanatory gaps with the endlessly reusable deus ex machina of “if the model doesn’t work, it’s probably because people are stupid. The model is fine. The model is always fine.” If we don’t use either of the two expressions just mentioned but instead say “economics” with no qualifiers, the reader is free to assume we mean something legitimate, as will hopefully be clear in context.
We will go into this in more detail later on, but our thinking is derived from, essentially, every other school: Classical, Austrian (i.e., the intellectual legacy of Menger’s superior contribution to the marginal revolution), Complexity, Post-Keynesian, New Institutional, German historical, Ergodicity, Marxist, Islamic and thinkers too heterodox to assign a “school” at all; not to mention study of fields other than academic economics and our real-life experience of running businesses and operating professionally in capital markets.
Consider the following essentially correct observation from “Dirt: The Erosion Of Civilizations” by David Montgomery:
“Almost unquestioningly accepted in Western societies, classical economics distilled from Smith’s views, as well as variants like Keynesian economics, neglect the fundamental problem of resource depletion. They share the false assumption that the value of finite resources is equal to the cost of using them, extracting them, or replacing them with other resources. This problem is central to soil exhaustion and erosion, given the long time required to rebuild soil and the lack of any viable substitute for healthy soil.”
The argument of “Bitcoin Is Venice” could perhaps be crisply captured as: What Montgomery said, except not just about soil, but every stock of capital humanity has ever inherited.
[ii] We were tempted to say “Sagans” but did not want to risk alienating the reader. Hopefully this endnote has provided a chuckle. [iii] “You don’t like finance? Does that mean you don’t like capitalism? What are you, a Marxist or something?” As a matter of fact, we believe this psyop has been so phenomenally successful that, in many cases, the most prominent and accurate critics are, in fact, Marxists. We quote a few at various places in “Bitcoin Is Venice,” which is not to say we endorse Marxism, but rather that we respect truth and its insightful analysis regardless of whatever other flaws its speaker may potentially and irrelevantly have.There is a deeper point to be made here that may well sound like a joke, but only because the insight it captures is contrary to a widespread meme so absurd as to be impossible to analyze without humor: The authors have enormous respect for actual Marxists as opposed to the vastly more politically successful proponents of fashionable illiberalism who have culturally colonized most of the Anglophone world. Via the degenerate fiat “capitalism,” they are making disconcerting inroads in Europe as well. The readers’ experience and reflections may differ, but our own are that if somebody tells you they want to seize the means of production because, despite their unease with the violence and mayhem this will likely imply, they think it will be a net gain for society, you can likely have a fascinating conversation with such a person. What will be most interesting about such an exchange will be the surprising common ground: an honest concern for long-term sustainability and flourishing, yet obviously passionate disagreement on the best means to achieve this end. In contrast, if the reader attempts the same conversation with a fashionable illiberal, they will quickly discover they have no respect for their existence as a human being or their right to engage in discussion. The reader will discover the fashionable illiberal sees them only as an obstacle in their quest for power to be manipulated or, if necessary, destroyed, and that the “conversation” is not an exchange of ideas but is itself a struggle for power. To refer back to “Wrestling With The Truth,” there is an obvious analog to different modalities of martial arts: The reader might naively assume they are in the octagon, bashing truths against one another to see what sticks, while the fashionable illiberal is doing their darndest to play the role of the hero in the movie set, putting on a show not to teach the audience but to manipulate them. And of course, this context shifting will be entirely subversive: They will lie to no end about desiring only to find the truth.
Real Marxists tend not to do this and often to resent that it is done by fashionable illiberals in their name, or by ignorantly and fallaciously co-opting their rhetoric. Ditto, in fact, of real conservatives, as opposed to what Matt MacManus has amusingly diagnosed in “The Rise Of Post-Modern Conservatism” (a far more accurate, and for that matter funnier, name, by the way, than the commonly accepted populism, which, as far as we can tell, simply means, democracy elites dislike). As McManus points out, Burke, Chesterton, Oakeshott and Scruton would be unimpressed and irritated by the “deep thinkers” of the “alt-right.”
The arguments of Marxists may be entirely unsound, in our opinion, but they are at least committed to arguing with validity, which is encouraging. Perhaps more importantly, they are committed to the premise and utility of arguing in good faith. Hence, to return to how this endnote started, we find no issue or contradiction in quoting them favorably when and where it suits. Marxists occasionally have by far the best critiques of degenerate fiat “capitalism” of anybody… besides Bitcoiners, of course. And notice, dear reader, we are eating our own dog food because this is precisely our general thesis: truth by discovery, not by decree. No one school of thought has a monopoly on the truth… besides Bitcoiners, of course.
[iv] Because Bitcoin fixes everything and this, as a thing, is quantified over by “everything.” We hereby propose Livera’s Syllogism, after Stephan Livera, who coined “Bitcoin fixes this.”This is a guest post by Allen Farrington and Sacha Meyers. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
