Wednesday, June 12, 2013

NSA and the unspoken tradeoff

Now that we libertarians have your attention for the moment, inasmuch as your general trust in the government is momentarily shaken, I felt I should take advantage of the opportunity to invite you to do some introspection as to root of the outrage you may be feeling toward the NSA. Instead of thinking about how the government can repair its damaged trust, I would invite you to reconsider the nature of your relationship with the government.

Barack Obama said a lot of silly things in his press conference on Friday in San Jose. However, if you remove the collectivism, he made one very sensible statement: "as a society" (You'll understand the need for quotes in a minute), "we" have to decide on a balance between privacy and security. Agreement with this statement may surprise you coming from a libertarian, but bear with me. It's very popular right now to completely disregard the NSA's claims that they are protecting us from a terrorist threat, and indeed there's plenty of reason to be skeptical of any secretive organization. However, I think that in a world with everybody acting of their own accord, where it's not all that hard to kill a lot of people at once, it seems at least rather plausible, to me, that the right group of people finding patterns in human activities can help anticipate such events. I won't go into the details of this, other people have written about it and you should probably consider what they have to say. However I will just take as a given, for the purposes of my argument, the plausibility that some amount of security can be bought at the cost of privacy.

So why am I so easily conceding this point as a libertarian? Have I gone soft? Isn't it the libertarian position that no amount of privacy is an acceptable compromise for security? No, the libertarian position is on a third axis, advocating for the maximization of liberty, which should not get conflated with privacy. Liberty is the ability to actually have a choice in the matter, between security and privacy, and as Mr. Obama implied, each of us can have a preference on how to best optimize between privacy and security in our own lives.

The distinction is much easier to illustrate this using everybody's other favorite *SA organization.

Hands in the air, citizen

Again, as much as I like to talk about overblown threats, I will concede that there is a non-zero utility to extra scrutiny at the airport (even if the TSA doesn't happen to be providing any such utility with their current procedures). However, a lot of people do believe that the TSA's procedures involving body scans are a violation of privacy.

Assuming you, the reader, are among them, I will ask you, why exactly is this a violation? Is it a matter of the degree of privacy invasion? Would it suddenly become morally acceptable again if the TSA only tried to detect metal on your person? Is this not also a violation of your privacy? How is that fundamentally different?

The principle in play cannot be that violations of privacy are categorically wrong, or else a metal detector would be considered a lesser violation, but a violation all the same. The principle cannot be that some sorts of privacy violation are acceptable, if it is below a certain threshold; that could only be a preference, not a principle. If that were the case, body scanners would not be an outrage as much as a matter of dissatisfaction with the conditions.

No, a metal detector is not fundamentally different. The reason there was no noticable outrage with metal detectors is that most people do not feel personally invaded when a metal detector is used on their person. Thus, the decision the government made for them happens to be the same one they would make for themselves. Two morally equivalent situations are producing a moral reaction only if the degree of one of the variables is sufficiently high, and I think the explanation is a moral principle at play that many people fail to recognize. What's going on is that there is an implicit moral problem that the government has made that decision for you. There is no transaction here between you and the government that has merely left you dissatisfied, the government just stepped in the way. The only transaction is between you and the airline, and the government has restricted the conditions you are allowed to make with the airlines.

SMBC Comics: Liberty vs Safety
credit: Saturday Morning Breakfast Cerial comics

One way to resolve this situation is to abolish the TSA, and hold the airlines liable for any damages done by, and (by default, before any waivers) within, their aircraft. They will have to decide how much they would be risking at each level of customer privacy intrusion, and how much privacy customers are willing to part with at the corresponding price point and with the corresponding gain in their own security. Once this occurs, there can be some justice in the matter, because the customer will be making a voluntary agreement (or not) with the airline, with no third party forcefully interjecting themselves.

We as a society

So let's go back to where Barack Obama talks about how "we as a society need to decide". This is obviously asinine on its face, as many have already pointed out, because "the society" wasn't even consulted on the matter, as they have been unaware of these NSA programs until last week. This makes it particularly outrageous, but is this the only source of outrage? Even if we knew about the program all along, do you suppose there would be no moral outrage? He still made the decision for you, and I'd be willing to bet that for a vocal handful of you, this would go beyond your threshold of preference. This is no different than the decision made by the TSA, that decision was made wide in the open. "The people" were well aware of it. Yet there was still a moral outrage.

And this comes to why I use quotations for these collectivist statements.

Perhaps there's a world where the snooping program is very popular, and you are one of a small minority who are not keen on it. Does it make it any less outrageous that somebody is making the decision for you, even if it's endorsed by 90% of the people around you?

The fundamental problem here is that there is no such thing as a decision made by a society. Decisions require thoughts, preferences, and reason, and the only relevant entities with these faculties are individual persons. A society as a whole has no such faculties. There is such a concept as "the will of the people", but to have any meaning it can only be a function of the wills of each individual person, and usually an ill-defined function at that. Majority rule is the usual standard, but there is nothing special about this particular function that makes it any more a true will of "the people", because "the people" is not an entity. Abiding by the output of such a function merely attempts to minimize the dissatisfaction of the members of the society. It aims to optimize for preference, but it can not make the outcome any less immoral.

This is why the government constantly claims to speak for "the people", to the outrage of so many persons. This will keep happening so long as enough individuals believe in this sort of collectivist concept. Outrage is not merely the result of corrupt persons within the government, though that is of concern, and those persons are happy to take advantage of this common collectivist viewpoint. This viewpoint is altogether illogical and will always lead to unhappy results.

A moral compromise

This episode is particularly outrageous because the founding documents that are used to justify Mr. Obama's power are written based on the principle that Americans have rights a priori. The government is instituted among "the people" (ok, so they weren't perfect), and is given permission, by "the people" to occasionally violate the rights of persons. The government does not dispense rights onto individuals at the government's discretion. Mr. Obama is in no position to be lecturing the individuals living within the US borders on what sort of intrusion they should be ok with, and what sort of "accountability" we should all be ok with. He should be asking for your forgiveness for taking your liberty! Do not let Mr. Obama tell you that there is a choice "the people" have to make, between privacy and security. Make your own judgement: is it an acceptable compromise of liberty that the president is even in the position to make this decision on your behalf? Because for him to even be in that position requires a moral compromise, with your liberty on the receiving end.

Unlike with the TSA, it is hard to conceive of a voluntary arrangement performing the same tasks as the NSA (though I am not asserting that it cannot be done). As such, you may be willing to make a compromise along the axis of liberty, since under the NSA everybody within the US borders has to have the same policy imposed on them. Because you value security, and because the threat is perhaps so great, you are willing to sacrifice a certain amount of liberty, which leads to a sacrifice of a certain amount of privacy at the discretion of the politicians. So when you consider this, recognize that if you accept the existence of the NSA, you are inevitably making a moral compromise, not just a compromise in privacy. Yea, if you accept the existence of any government program, you are making a moral compromise.

Now, am I saying you should never make a moral compromise? I will not necessarily tell you that, at least not for the purposes of this argument. To take an extreme example, I would personally be willing to put up with a certain amount of moral compromise if I truly believed it was the only way to prevent a nuclear holocaust. But I ask you, when considering a proposal for an expansion of government, don't just weigh "pros" and "cons", and let the government tell you that they're balancing your privacy, security, or any other factors for you. Recognize that any proposal for an expansion of government is immoral first and foremost, and then decide if the moral compromise is worth it, and consider if there is an alternate solution, not involving government expansion, that allow for individuals to balance these factors according to their own preferences.

Thursday, June 6, 2013

The Fallacies at the Root of Bitcoin's Value: Part 1 - "Intrinsic Value"

I will admit that the whole Bitcoin (aka BTC) phenomenon is fascinating to me. Technologically it's astonishing. As a libertarian, politically I find it very exciting. So being a libertarian, I may be a bit of an anomaly these days in that here I am taking a position against it.

From the beginning when I heard about BTC, I thought, here's something that excites a few technologically oriented libertarians because of its subversive nature. But these must be libertarians who haven't thought that much about the economics involved. Any day now, I assumed, the opponents of fiat currency would get word of it and step in and set their brethren straight. This was, after all, a currency which, just like the Federal Reserve Note (aka FRN, aka US Dollar) is backed by nothing of what I considered actual value. This is "fiat currency", without the fiat. The only fundamental difference, I figured, is that it cannot be inflated (which I will not deny is in itself very important). Of course instead, it's taken the libertarian world (among other worlds) by storm. It started with a lot of skepticism, but most of the skeptics seem to have been won over. There remains a handful of holdouts, and today, at least vocally, we seem to be in the minority.

So I will try to make my economic case against BTC in a series of posts (it's unfortunately ballooned into something way too big for a single post). I will not go into certain economic criticism, such as the argument that it is bad for being deflationary. Other people cover that argument better than I do, and I'm not sure how I feel about it anyway. I will go into very few technical details, there are again much better sources on the Internet than myself for that.

Fiat Currency, without the Fiat

My principal argument against BTC is that it has no significant use value, and as such its value almost entirely consists of a bubble, and is bound to collapse. I say "significant" use value because I will concede that the current novelty of BTC very likely has an effect, however I suspect novelty cannot last after it is no longer novel. Beyond that, it is merely people speculating on that novelty, and (likely to a greater extent) on each other's speculation.

Of course this is nothing new, it's an argument that BTC proponents have heard all too often and for which they have prepared counterarguments. However I believe that the counterarguments are not well founded. Just about every claimed source of value of BTC fails, in my mind, to justify it. Some claimed sources, such as scarcity, are not actually a source of value (though it affects price). Some, such as value from being able (with some effort) to buy anonymously, are actually a secondary source of value which requires an existing primary source (no different than how durability of metal adds value to it). Some, such as value from being accepted by vendors, are merely a form of speculation.

If you agree with me so far, there's also the counterargument that precious metals have the same concern as BTC, that they must be in a massive bubble right now given how high they're trading over what one may presume would be their market rate purely from use value. This may be true, but I'm inclined to think that their use value gives the exchange rate a certain floor. If the Silver (aka Ag) price were to crash to near zero, some enterprising individuals would make bids for as much Ag as they could get their hands on in order to sell it to consumers, and this would very quickly revive the exchange rate. A new bubble could always reform on top of this. BTC has no such guarantee.

If this is still not a cause for concern to you as a BTC proponent, I understand. Personally, it makes me inclined to think that BTC cannot last in the long run, but I'm not able to make any stronger argument that it wouldn't. However, I would at least like you to recognize along with me how little BTC is hanging on.

I have barely touched the specific counterarguments here, I will go into all of these counterarguments in detail in future posts. However for this post, I would like to first address the important question of reasoning about value in itself.

"Intrinsic Value"

What is meant by value, exactly? Some fellow opponents of BTC will point out that BTC has no "intrinsic value". Proponents will be quick to point out that there is no such thing as "intrinsic value". Note that I did not use this term in stating my own case, because I realized that this term is too ambiguous to be worth using in this discussion. Of course the proponents are correct that all valuation is totally subjective. Nothing has "intrinsic value", in that the value of an object is the value an individual attributes to that object. From this standpoint, yes, it looks very much like Ag and BTC are on equal ground. However there is more to be said about the nature of value.

We must have a starting point when discussing value. It is difficult to give a sufficient definition of value, but fortunately we can sidestep this specific question. It suffices to attribute to value the following property: value manifests as an individual's decision to choose one action or object or set of objects over another. In economics, there is no need to describe exactly what, if anything, value actually means. There is no need to attribute a cardinal or nominal quantity to value. When it comes to one collection of commodities over another, we only need to declare that something is of greater value than another to a given individual if that individual chooses that thing over the other. As such, despite valuation being subjective by definition, its manifestation is objective. Also worth noting is that we can attribute ordinal quantity to value.

Ultimately, all decisions in an economic actor's life aim toward a state of maximum satisfaction. This satisfaction is very generally defined, and can take on many forms. But all actions have an ultimate purpose, with a logical framework (however faulty), and a set of information (however faulty) that has lead the person to believe that their satisfaction will most likely be maximized given a particular action. Thus, if a person values one collection of commodities over another, it is tantamount to saying that the person believes, given certain information and logical reasoning, that the chosen collection will lead to greater satisfaction than the other collection.

There may be fundamentally different sources of value. Some sources of value stem from an expectation of immediate gratification. Some sources of value stem from the conclusion that the object may later be exchanged for something that will give greater gratification. This is where the differences between BTC and Ag start to arise. Given what I've asserted about value, BTC demonstrably has value, because people are choosing to exchange other things for it. However I argue that certain fundamentally different sources of value apply to Ag that do not apply to BTC, and they have consequences that affect how people will value these commodities in the long term.

I will briefly note here that we can observe the consequence of valuation between different commodities by their exchange rates. Though valuation and exchange rate have an effect on one another, they are not synonymous. I will talk more about this in a later post when I discuss scarcity. Furthermore, there are factors in addition to valuation that affect exchange rate, and (more obviously) there are factors in addition to exchange rate that affect valuation. However, if the valuation of a certain commodity by everybody in the market is none, it would imply that nobody would exchange anything for that commodity, thus the commodity would have a zero exchange rate vis a vis every other commodity.

Different sources of value

The reason it's important to understand the nature of value is to highlight the fact that there are sources of value that are fundamentally different from each other in nature. Again, some sources of value of an object are due to the user deriving satisfaction directly from the object. In such cases, the valuation is unaffected by valuations that other people make on the object. Supposing an economic actor, Sally, reasons that if she makes the decision to make an exchange of coffee for Ag, she will be happier for it. Sally is making a subjective valuation, based on her own direct preferences between coffee and Ag.

Some other sources of value are based on the actor's understanding of the state of the economy. For instance, supposing an economic actor, Jim, would be directly satisfied by coffee, but he currently holds grapes. His reasoning may be that if he makes the decision to make an exchange of a certain amount of grapes for a certain amount of Ag, he can make another exchange with the Ag at a later point in time for a certain amount of coffee. Jim is also making a subjective valuation, but it is not simply based on his own preference between grapes and coffee, but also based on his speculation on the existence of somebody like Sally, who values Ag and holds coffee.

If there is a general tendency for Ag to render utility for individuals such as Sally, there should always be the potential for an exchange rate between Ag and other commodities. If there is a general tendency for individuals such as Jim, people who believe in the existence in Sallys, to exist, there will be a potential for an exchange rate, so long as Jim still believes in the existence of Sally. If Jim one day realizes he is wrong, his valuation will have to make a correction, and if this happens after he trades his grapes for Ag, he will be left disappointed.

So, when fellow opponents of BTC talk about BTC's lack of "intrinsic value", they are generally talking about the lack of valuations similar to Sally's. Yes, both Sally's and Jim's valuations are subjective, like all valuations, but only Sally fully understands her own preferences. Holders of a commodity are generally like Jim. They are hoping that Sally exists. It doesn't suffice that other Jims exist, because making a valuation based on that sort of speculation would just be betting that other bets. They don't just want to know that there are other people placing the same bet, they should be looking for assurance that they're right.

Final Comments

This is armchair economics. However, lest I try to take credit for others' ideas, I will note that a lot of my examination is informed by my casual readings into the Austrian school of economics, in that I'm analyzing the logical outcome of scenarios based on individual purposeful actions, with expected outcomes based on logical reasoning (faulty or otherwise). However one thing that still doesn't make any sense to me is Mises' regression theorem (though I haven't read deeply into it yet). What I am arguing probably flies in the face of it (even though I know some Austrian holdouts actually use this same theorem to argue against BTC). And I know that some, if not most, Austrian economists are in favor of BTC. So, all the same, don't take anything I'm saying as a fair representation of the Austrian view. (And if Robert Murphy reads this and sets me straight it would make my day.)

As I have considered the potential sources of value of BTC, I have come up with more specific classification than what I've described here. In my next post, I will talk more about them, and how they apply to commonly claimed sources of value put forth by BTC proponents. In subsequent posts, I will address specific claimed sources of value in greater detail.