Are cryptocurrencies just, as Paul Krugman memorably said, ‘libertarian derp’? The aim of this article is to argue that they aren’t, and that there’s a good case to be made that they can further a socialist — indeed, Marxist — agenda, in particular as concerns banking. In order to do so, I’ll briefly explain what I mean by socialism, what I mean by cryptocurrency, and what I mean by banking, and then tie this material together with a couple of arguments.
(Added a few days after writing: some of the argument below is vitiated by the fact I either didn’t know or had forgotten about credit unions when I wrote this. I think some of it maybe still stands; certainly the second argument, anyway. And added 14 months after writing: this seems to be getting some readers so let me point out that I should really have said both that the theory of the value of labour below is heterodox (I don’t believe it myself) and that contemporary banking is wildly more complicated than I sketch. Nevertheless I think the roughly leftist case for cryptocurrency and in general decentralized tech is underrepresented, so I am keeping this piece up (also because I don’t delete things)
And one more addition: for another use-case of blockchain-esque technology to improve social reality, you could take a look at this, which sketches an attempt to improve by decentralizing peer review, to the benefit of science. I’m actively working on this, possibly with a view to implementing some part of it on the journal I edit, and if you are interested in working with me and have the technical ability (as concerns things like ring signatures/multisig implementations/zero knowledge proofs), please get in touch.)
Socialism: Value And Exploitation
Imagine, to simplify massively, you live on an island with trees which produce a special fruit that will satisfy all your needs (hunger, thirst, somehow rest, somehow clothing, somehow medical stuff). Imagine, moreover, that Capitalist owns the island and all it contains, and you’re trapped on it.
You need to forage and then eat, say, four fruit per day to survive. But it’s the Capitalist’s island, the Capitalist’s trees.The Capitalist tells you: okay, you can forage here. However, you have to forage ten fruit per day — you can have four, but I get six. You agree. What else can you do, after all? You’ll starve otherwise. The Capitalist takes the six fruit, eats the four he needs to survive, and exports the other two to a neighbouring island in exchange for bacon.
Because the Capitalist owns what is needed for you to survive (the trees and what they produce), you’re forced to work for the Capitalist in order to sustain yourself. If the land were communally owned, you wouldn’t have to: you could just forage four fruit, and spend the rest of the day swimming or reading.
This little parable illustrates pretty well, I think, some of the central Marxist views about work, about how society is divided into classes depending on who owns and who works, and about how that division leads to exploitation of the latter by the former.
In a bit more detail: Humans are strange. They both have and produce value. Other things only have value. Shoes, for example, have value — they are worth something (a pair of shoes is worth more than a scarf, for example, less a tuxedo). For Marx, the value of a commodity (to simplify, but not damagingly) is the amount of labour needed to make it — shoes are more expensive than scarves because they require more labour.
But humans are commodities too, or rather their labour is — it is something that has value, that can be bought and sold. What is the value of day’s worth of labour? Well, plugging in what we said above, we get that it’s the amount of labour needed to produce it. What is that? It’s just the food and other resources needed to get the worker to the factory gate at 9 am, and to ensure they don’t collapse from starvation, illness, or exhaustion during the working day (more precisely: it’s the labour required to produce those resources).
So human labour has value. But returning to our shoes, human labour also produces value. It is humans that make valuable shoes, for example. We can then say that the value produced by a worker (in a day) is the value of the shoes the worker can make on that day. And the value a day’s worth of labour has is what is required to sustain the worker throughout a given day (yesterday’s food, shelter, etc.) The capitalist profits because they own the means (land, factories) of sustaining labourers. That means that the labourer has no choice but to sell their labour, but the capitalist can take advantage of the fact that the value their labour has (what it costs to keep the labourer alive) is less than the value their labour creates. In this way, the capitalist can exploit the labourer and profit.
Explaining what cryptocurrencies are is kind of non-trivial, and I won’t really try. I will concentrate on giving a rough account of the most famous one, bitcoin. One way to think of it is as a special kind of data structure. Very roughly, it contains a bunch of messages that encode a numerical value n. If you have the right by knowing a special key (think of it like a digital signature), you can add messages to the structure that says something like ‘I move the value (n) in message x to message y. Signed: me’. Fancy cryptography verifies the correctness of the signature, guaranteeing that you can only move values that are yours, and also guaranteeing that no one looking at the messages knows who in the real world is signing which messages, preserving anonymity even though everybody can see everybody else’s transactions.
By having that right to send a message x, we can say that you possess the bitcoin value (n) in message x. If I have the key to message y, then I can ask you: please write a message, using a message you have the key to (x), sending the value of that message to y. In return, I will pay you the dollar equivalent of that value, as fixed by the current dollar-bitcoin exchange rate.
These messages get broadcast to a network of users. People collect them into blocks, bunches of messages, and compete with each other to update the data structure with the new block, containing the most recent messages that have been broadcast. They do so because if they win the competition — which is hard to do — they get rewards in the form of some bitcoin. In particular, if they win the competition, they can write a message giving bitcoin that are created in the process of updating the structure to themselves.
By a clever design, it is both extremely hard to update the data structure with a new block, and more or less impossible to change blocks that were already added some time ago. This latter fact means that the structure is more or less unmutable — it can’t be tampered with. The former fact, combined with the fact that updating the structure is rewarding, incentivises people to propose honest and accurate updates. The reason for this is that if they propose a dishonest or inaccurate one (the possibilities of doing which are anyway sharply constrained by the software), then people will ignore it, and since part of the update involves attributing bitcoin to the updater, it’s in the updater’s interests that everyone accepts it.
The actual details, though fascinating, are not super important (probably a good job, since I doubt the explanation I just gave is overly helpful. Much better is this and this book.) But the important thing is that the blockchain is a trustworthy encoding of transactions of bitcoin and one that doesn’t require any centralized agency to oversee it.
But … why does anyone pay any real money for the right to write these messages? Well, partly because others do, and partly because, conditional on others’ doing so, it offers some advantages. It enables you to transact with people at a distance without going via banks or other processors, which is useful if you don’t want people knowing your business — it’s digital cash, in the sense that it’s a means of transferring value (anonymously, thanks to the fancy cryptography) directly from person to person (by contrast with credit, which requires an intermediary). And, of course, a lot — alas probably most — people buy it because, as you’ve probably read, there is money to be made — it’s a new and bizarre thing to speculate on, and some speculators do very well indeed.
But the important point for our purposes is that it offers, or at least promises to offer, a way of doing some of the things banks offer without banks. And that’s good for the reason I’m about to get to.
Fractional Reserve Banking
Banking has a sort of alchemical quality. When you (if you ever actually do this anymore, I don’t know when the last time I did was) go to the teller or the ATM and deposit money, it might seem that you are, indeed, depositing it, like depositing your coat in a cloakroom — you give it to them, and they put it in a big vault.
Of course, that’s not what happens. Rather, you give them the money, and they loan a portion of it out (say, someone starting a new business). They do the same with everybody else, with the result that money seems to come from nothing: once they’ve loaned it out, the businessman can buy things with it, but because the bank doesn’t loan out quite all of the money they receive in deposits, if some people go to the ATM to get back their deposit, they can do so without problem. The banks reserve a fraction of their deposits to service short term needs of depositers, loan the rest out and everything works great.
In this way, the bank gets something from your custom — they, after all, get to charge interest on the loans they make with your money. You get something in the form of (in theory) some interest, and you also get a safe way to ‘store’ your money, that avoids fire and flame and loss.
This works pretty well, in general, apart from whenever there is a bank run, in which case everybody seeks to reclaim their deposits at once. Because most of that money is out there circulating as loans, banks in theory struggle in those circumstances, and the clever house of cards threatens to, and indeed sometimes does, fall (this threat is typically mitigated by deposit insurance).
What should the socialist (Marxist) say about all this?
Well, think about it like this. You own something — some money. You worked hard for it, and indeed for the Marxist you were exploited for it, in the sense that you got less than you would have got had you not been subjugated by the capitalist.
But thanks to fractional reserve banking you get exploited again! First it was your labour, now your money. You give it to the bank, getting extremely poor interest rates, and it gets lent out to the disproportionate benefit of the already rich.
Why to the disproportionate benefit of the already rich? Well, I’m assuming as a premise (I grant a controversial one) that the loans offered by banks primarily benefit people already doing pretty well, and don’t benefit people struggling in any meaningful way (roughly, the justification for this is the falsity of trickle down theory — economic activity benefits the already well off, and banking supports economic activity).
Accordingly, if you buy the claim that the banking system is a crucial prop in an economic system that doesn’t benefit you, a secondary exploitation, then you should seek other ways of banking. And cryptocurrencies at least promise that.
Isn’t this just an argument for nationalizing banks?
Wait a second, you might think. A socialist response to labour exploitation is that one expropriate the capitalists and make it so that the value labour produces gets shared among the many. One might think the proper socialist response here, accordingly, is just to say the same thing about banks. We should continue with fractional reserve banking but use the loans it allows in the service of businesses we all benefit from.
Fair enough: that is the proper socialist end goal. But it is an end goal. And a view one sees frequently enough is that our end goals and our more near term goals differ. A couple of weeks ago, I reviewed a book about socialism (Sunkara’s The Socialist Manifesto), a central claim of which was that although socialists and progressivists might seem like they’re after the same thing (government healthcare, education, etc.) their end goals differ. The socialist thinks that Medicare for all is just a stopping point on the way to a socialist society that does away with capitalist exploitation, while the progressivist thinks that a nice managed capitalism is what we should aim for.
(There seems to be an interesting view of what we could call political dynamics here: if you imagine the political possibilities of a society as a line, then to move a society from right to left involves first moving it across the intervening distance, which is to say move it gradually leftwards. I don’t know if history bears this incrementalist picture out.)
I think I can take this idea over — adoption of cryptocurrency should be a non-terminal goal for the socialist. It’s too much to ask that banks be socialized any time soon, but any of us, today, can move our money into bitcoin (or other such cryptocurrencies), thereby, if you buy my argument, lessening the extent to which we and our money are exploited. Even if the ultimate aim should be nationalization, our more proximate aim, interestingly and perhaps ironically, should be the more libertarian idea of being sovereigns of our banking selves. If you want to stick it to the economic powers that be, the best thing to do is store your money in cryptocurrency (or rather, in a cryptocurrency less volatile (but also untethered from fiat) than those around today.)
One of the more attractive slogans associated with the crypto world is that it promises to bank the unbanked. And there are a lot of unbanked — 1.7 billion, according to a quick google. One can, even while remaining relatively politically neutral, think that anything that furthers this goal is worth paying attention to, noting, for example, the (tentative) evidence that direct payments to poor people is one of the best ways of helping them out of poverty.
But it’s interesting that one can also develop a socialist argument in favour of banking the unbanked. Recall the slogan of The Communist Manifesto: Workers of the world, unite! A pretty good case can be made that this uniting of the workers will be aided by banking the unbanked workers.
If you want, say, to organize a Marxist study group in a poor country, you need teachers, resources, etc. That takes money. A truly internationalist socialist movement, one might think, wouldn’t exclude those unable to use conventional banking — it would have a truly internationalist currency, one without borders. And cryptocurrencies are internationalist. If this is so, then the very propagation of the idea of socialism might — again ironically — require a libertarian-by-design currency.
I haven’t even said all there is to say. I haven’t mentioned the 2008 crisis, partly because it seemed like shooting fish in a barrel. And I haven’t touched monetary policy issues, such as in particular inflation (bitcoin is touted as a deflationary currency), because I don’t really know what to say. But if anything I think the case could be made stronger than it has been here.
Of course, what I’ve said invites rebuttal. Anecdotally, many leftist people of my acquaintance dislike bitcoin not from any anti-libertarian animus (although there is a fair bit of that) but because of its environmental effects. Even if, you might say, the arguments developed here were right, now is not the time to encourage something so wasteful of energy. And you might — indeed, you actively should — be wary of treating bitcoin as a store of value in light of the fact that its exchange rate with fiat currency varies wildly.
I grant all this. And perhaps it’s better to understand what I’ve put forward here as a goal, as a (partial) utopia. We shouldn’t all race into bitcoin today; but we should see the ideas behind cryptocurrency as offering a way to further the socialist aims, ideas that need to be developed and fixed, certainly, but ones deserving of much more attention than they currently receive.