Meditations on a Formal Model for The Problem and Solution to our Global Economy

…the monetary authority in Country A cannot set its bank rate too high. Otherwise, the resulting gold inflow will offset what they were attempting to achieve by raising the bank rate.

… the monetary authority in Country A cannot set its bank rate too low. Otherwise, the resulting gold outflow will offset what they were attempting to achieve by lowering the bank rate.

…the cost of gold arbitrage in effect determined a policy corridor in which a central bank could set its bank rate different from other bank rates.

Under a Bitcoin standard, however, it will not be possible for a country to conduct an interest rate policy to affect domestic economic conditions. As (1) shows, it was the cost of engaging in gold arbitrage that allowed a country to set a bank rate that differed from those in other countries under the gold standard. Such arbitrage costs do not exist for the Bitcoin standard; that is, k = 0. The costs of arbitrage between the fiduciary currencies of any two central banks are essentially zero. The time cost of obtaining Bitcoin for fiduciary currency or fiduciary currency for Bitcoin would be extremely small, and because the ledger containing transactions history is open and transactions are recorded regardless of location, no shipping or insurance costs are involved. Thus, the spot exchange rates for all fiduciary currencies would be one-to-one, and monetary authorities would be unable to set interest rates different from those in other countries.

Metcalfe’s Law states that a value of a network is proportional to the square of the number of its nodes. In an area where good soils, mines, and forests are randomly distributed, the number of nodes valuable to an industrial economy is proportional to the area encompassed. The number of such nodes that can be economically accessed is an inverse square of the cost per mile of transportation. Combine this with Metcalfe’s Law and we reach a dramatic but solid mathematical conclusion: the potential value of a land transportation network is the inverse fourth power of the cost of that transportation. A reduction in transportation costs in a trade network by a factor of two increases the potential value of that network by a factor of sixteen. While a power of exactly 4.0 will usually be too high, due to redundancies, this does show how the cost of transportation can have a radical nonlinear impact on the value of the trade networks it enables. This formalizes Adam Smith’s observations: the division of labor (and thus value of an economy) increases with the extent of the market, and the extent of the market is heavily influenced by transportation costs (as he extensively discussed in his Wealth of Nations).

A Bitcoin standard would have two major benefits over current fiat money standards. One is that there would be greater price-level predictability due to the known, deterministic rate at which new Bitcoins are created. A second is that the resources currently devoted to hedging against fluctuations in exchange rates would be freed up to be used in more productive ways.

…a global money standard could have a value similar to that of standard measures such as those of the metric system.

There is tremendous value in simply having prices quoted conveniently.

Nonetheless, in my opinion it is unlikely that the Bitcoin standard will come into existence, because governments and central banks will take actions to prevent it.

Thus I think that “asymptotically ideal money” is a real possibility and that problems of political coordination do not make this very difficult to be achieved. But also, if there is in the first stage of progress the advent of “asymptotically ideal” currencies then after that level of what might be called “rationalization” is achieved there would be the possibility of an international collaboration to set up value standards analogous to the standard measures used in the internationally accepted “metric system”.

The actors on the stage of the drama formed by the actions that determine the trends in the value of a national currency are themselves players in a game and they can be rationally viewed as such. The theme of “rational expectations” naturally enters. Those who ARE NOT in control but who ARE naturally concerned with the expectations for the value trend of a national currency cannot be wisely assumed to be entirely naive and unable to form “rational expectations” regarding the currency. So the (possibly) “Keynesian” players in this game have natural opponents (or co-players, beyond zero-sum perspectives) who are interested in not being themselves “outsmarted” by those who control the options that determine, say, the quantity supplied of the national currency.

Another possibility is there could be political pressure demanding that central banks or governments offer an intrinsically useful fiduciary currency to compete with Bitcoin. By an intrinsically useful fiduciary currency I mean a currency backed by some commodity or basket of commodities. If central banks or governments could credibly commit to redeem this currency on demand, and if they were willing to give up their own monetary units and adopt a uniform one, then this might be widely accepted as a medium of exchange and might drive out Bitcoin to a great extent. My reason for including the elimination of individual country monetary units is to make clearing simpler and to facilitate the use of the currency across country lines. In other words, the Bitcoin standard might not be stable because a eurolike commodity-backed money could provide the benefits of the Bitcoin standard without its inherent stability issues.

GTO play is in some sense “correct”. For example, in the game of rock-paper-scissors, the GTO strategy is to throw each choice randomly 1/ 3 of the time. Of course, it is hard for humans to be completely random, but insofar as you can, nobody will be able to beat you in RPS in the long term if you play this strategy. However, if you are ever playing a strategy that involves throwing any action with other than a 1/ 3 probability, your opponent can take advantage of you. In fact, he can do very well just by figuring out your most likely throw and using whatever counters it 100% of the time, at least until you notice and change your strategy.

This motivates the primary reason we will focus on GTO play. You have to have some idea of what it looks like before you can even start thinking about what your opponent is doing wrong and implementing a strategy to take advantage of it. You must know that the correct rock-throwing frequency is somewhere around 1/ 3, before you are able to come to the conclusion that an opponent who throws rock 40% is doing it “too much”. Once you know what your opponent is doing and how that deviates from correct play, it is pretty easy to see how to exploit it. The same thing is often the case, to a degree, in poker. Once you know what “correct” play is and can compare it to an opponent’s strategy, figuring out an appropriate response is usually not all that difficult. The difference between RPS and poker, however, is that poker is much more complicated. In fact, nobody really knows what this correct play is.~Tipton, Will. Expert Heads Up No Limit Hold’em, Volume1: Optimal and Exploitative Strategie

Pick a side, the colour doesn’t matter. You are your side with your beliefs based on your experience. The other side, red if you are blue, is the person or people in the world that have views so counter to yours it’s unfathomable to you how they could be so ignorant.

And they feel perfectly the same about you.

(1): Games with transferable utility. (and) (2): Games without transferable utility (or “NTU” games). In the world of practical realities it is money which typically causes the existence of a game of type (1) rather than of type (2); money is the “lubrication” which enables the efficient “transfer of utility”. And generally if games can be transformed from type (2) to type (1) there is a gain, on average, to all the players in terms of whatever might be expected to be the outcome.

Here we can return to the understanding that money has the practical value of creating games for traders. These are games with transferable utility, but if the money were not available, the game of the traders would be a game without transferable utility and thus naturally a game with less efficiency with regards to the possibilities for the participants to maximize their combined gains.~Ideal Money

Rationalization is a reorganization of a company in order to increase its efficiency. This reorganization may lead to an expansion or reduction in company size, a change of policy, or an alteration of strategy pertaining to particular products.~

In psychology and logic, rationalization or rationalisation (also known as making excuses[1]) is a defense mechanism in which controversial behaviors or feelings are justified and explained in a seemingly rational or logical manner to avoid the true explanation, and are made consciously tolerable — or even admirable and superior — by plausible means.[2] It is also an informal fallacy of reasoning.[3]

Rationalization (sociology) … In sociology, rationalization or rationalisation refers to the replacement of traditions, values, and emotions as motivators for behavior in society with concepts based on rationality and reason.

Our view is that if it is viewed scientifically and rationally (which is psychologically difficult!) that money should have the function of a standard of measurement and thus that it should become comparable to the watt or the hour or a degree of temperature. And money, as an efficient practical means of transferring utility, naturally links directly with the game theoretic idea of “TU games” (games with transferable utility).~Ideal Money



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