http://www.mises.org/fullstory.asp?control=1333
The importance of the Austrian school of economics is nowhere better demonstrated than in the area of monetary theory. It is in this realm that the simplifying assumptions of mainstream economic theory wreak the most havoc. In contrast, the commonsensical, "verbal logic" of the Austrians is entirely adequate to understand the nature of money and its valuation by human actors.
Menger on the Origin of Money
The Austrian school has offered the most comprehensive explanation of the historical origin of money. Everyone recognizes the benefits of a universally accepted medium of exchange. But how could such a money come into existence? After all, self-interested individuals would be very reluctant to surrender real goods and services in exchange for intrinsically worthless pieces of paper or even relatively useless metal discs. It's true, once everyone else accepts money in exchange, then any individual is also willing to do so. But how could human beings reach such a position in the first place?
One possible explanation is that a powerful ruler realized, either on his own or through wise counselors, that instituting money would benefit his people. So he then ordered everyone to accept some particular thing as money.
There are several problems with this theory. First, as Menger pointed out, we have no historical record of such an important event, even though money was used in all ancient civilizations. Second, there's the unlikelihood that someone could have invented the idea of money without ever experiencing it. And third, even if we did stipulate that a ruler could have discovered the idea of money while living in a state of barter, it would not be sufficient for him to simply designate the money good. He would also have to specify the precise exchange ratios between the newly defined money and all other goods. Otherwise, the people under his rule could evade his order to use the newfangled "money" by charging ridiculously high prices in terms of that good.
Menger's theory avoids all of these difficulties. According to Menger, money emerged spontaneously through the self-interested actions of individuals. No single person sat back and conceived of a universal medium of exchange, and no government compulsion was necessary to effect the transition from a condition of barter to a money economy.
In order to understand how this could have occurred, Menger pointed out that even in a state of barter, goods would have different degrees of saleableness or saleability. (Closely related terms would be marketability or liquidity.) The more saleable a good, the more easily its owner could exchange it for other goods at an "economic price." For example, someone selling wheat is in a much stronger position than someone selling astronomical instruments. The former commodity is more saleable than the latter.
Notice that Menger is not claiming that the owner of a telescope will be unable to sell it. If the seller sets his asking price (in terms of other goods) low enough, someone will buy it. The point is that the seller of a telescope will only be able to receive its true "economic price" if he devotes a long time to searching for buyers. The seller of wheat, in contrast, would not have to look very hard to find the best deal that he is likely to get for his wares.
Already we have left the world of standard microeconomics. In typical models, we can determine the equilibrium relative prices for various real goods. For example, we might find that one telescope trades against 1,000 units of wheat. But Menger's insight is that this fact does not really mean that someone going to market with a telescope can instantly walk away with 1,000 units of wheat.
Moreover, it is simply not the case that the owner of a telescope is in the same position as the owner of 1,000 units of wheat when each enters the market. Because the telescope is much less saleable, its owner will be at a disadvantage when trying to acquire his desired goods from other sellers.
Because of this, owners of relatively less saleable goods will exchange their products not only for those goods that they directly wish to consume, but also for goods that they do not directly value, so long as the goods received are more saleable than the goods given up. In short, astute traders will begin to engage in indirect exchange. For example, the owner of a telescope who desires fish does not need to wait until he finds a fisherman who wants to look at the stars. Instead, the owner of the telescope can sell it to any person who wants to stargaze, so long as the goods offered for it would be more likely to tempt fishermen than the telescope.
Over time, Menger argued, the most saleable goods were desired by more and more traders because of this advantage. But as more people accepted these goods in exchange, the more saleable they became. Eventually, certain goods outstripped all others in this respect, and became universally accepted in exchange by the sellers of all other goods. At this point, money had emerged on the market.
The Contribution of Mises
Even though Menger had provided a satisfactory account for the origin of money, this process explanation alone was not a true economic theory of money. (After all, to explain the exchange value of cows, economists don't provide a story of the origin of cows.) It took Ludwig von Mises, in his 1912 The Theory of Money and Credit, to provide a coherent explanation of the pricing of money units in terms of standard subjectivist value theory.
In contrast to Mises's approach, which as we shall see was characteristically based on the individual and his subjective valuations, most economists at that time clung to two separate theories. On the one hand, relative prices were explained using the tools of marginal utility analysis. But then, in order to explain the nominal money prices of goods, economists resorted to some version of the quantity theory, relying on aggregate variables and in particular, the equation MV = PQ.
Economists were certainly aware of this awkward position. But many felt that a marginal utility explanation of money demand would simply be a circular argument: We need to explain why money has a certain exchange value on the market. It won't do (so these economists thought) to merely explain this by saying people have a marginal utility for money because of its purchasing power. After all, that's what we're trying to explain in the first place—why can people buy things with money?
Mises eluded this apparent circularity by his regression theorem. In the first place, yes, people trade away real goods for units of money, because they have a higher marginal utility for the money units than for the other commodities given away. It's also true that the economist cannot stop there; he must explain why people have a marginal utility for money. (This is not the case for other goods. The economist explains the exchange value for a Picasso by saying that the buyer derives utility from the painting, and at that point the explanation stops.)
People value units of money because of their expected purchasing power; money will allow people to receive real goods and services in the future, and hence people are willing to give up real goods and services now in order to attain cash balances. Thus the expected future purchasing power of money explains its current purchasing power.
But haven't we just run into the same problem of an alleged circularity? Aren't we merely explaining the purchasing power of money by reference to the purchasing power of money?
No, Mises pointed out, because of the time element. People today expect money to have a certain purchasing power tomorrow, because of their memory of its purchasing power yesterday. We then push the problem back one step. People yesterday anticipated today's purchasing power, because they remembered that money could be exchanged for other goods and services two days ago. And so on.
So far, Mises's explanation still seems dubious; it appears to involve an infinite regress. But this is not the case, because of Menger's explanation of the origin of money. We can trace the purchasing power of money back through time, until we reach the point at which people first emerged from a state of barter. And at that point, the purchasing power of the money commodity can be explained in just the same way that the exchange value of any commodity is explained. People valued gold for its own sake before it became a money, and thus a satisfactory theory of the current market value of gold must trace back its development until the point when gold was not a medium of exchange. *
The two great Austrian theorists Carl Menger and Ludwig von Mises provided explanations for both the historical origin of money and its market price. Their explanations were characteristically Austrian in that they respected the principles of methodological individualism and subjectivism. Their theories represented not only a substantial improvement over their rivals, but to this day form the foundation for the economist who wishes to successfully analyze money.
It is now clear that the U.S. Department of Homeland Security need rely on no-one to advise them on computer security risks to the homeland. The binary choice of Microsoft as either a) good or b) bad, has now become a unary choice of a) good. At least, by all gainfully employed security experts [1].
So, why waste the taxpayer's money in asking anyone?
This may make USG purchasing decisions easy, but the expulsion of Dan Geer was rather ham fisted, and will haunt Microsoft in the private sector for some time.
IBM used to pull this trick, back in the good old days of pre-net (I'm talking the 70's and 80's here...). Then, if you went up against the IBM purchasing decision, you knew your job was on the line.
Everyone in the industry knew what "nobody ever got fired..." meant. It didn't only mean that your job was safe if you bought IBM, it also meant that you could be receiving your pink slip for challenging the decision.
Thankfully, those days are long gone, and IBM has real competitors to protect each and every purchasing IT decision maker against the manipulations of a dominating provider. Yet, Microsoft seems to have blundered into this situation without realising the dangers. It has handed its compeititors a no-risk sales argument, as they will never let anyone forget that Microsoft wields immense power - distorting, damaging, and blind power that can do as much harm to the purchaser as it can do good.
Not to mention AtStake, who will probably sink into the mire of the old party game: "remember AtStake?" What on earth are people going to say when they hear that AtStake has been hired to work on securing the next generation of Aegis cruisers or the new Total Awareness Solution?
"Oh, we'll be safe until someone gets fired..."
"At least anyone who's fired can get a job with El Qaeda..."
The good news is that if they do go down, at least the employees will have the added benefit of being fired by @Stake.
I wonder how long it will be before people have forgotten the true pedigree of the phrase "nobody ever got fired for buying IBM?"
[1] These links have been posted on the cryptography archives:
bostonherald
ecommercetimes
mgnetwork
Peppercoin, a venture by Ron Rivest and Silvio Micali to monetarise certain token money ideas based on statistical settlement, raised some money ($4 million on top of $1.7 million).
This is a standard crypto-hype-venture capital-DRM play. The crypto is cool, the people are the doyens of the cryptography field, and the market is open. What more perfect combination?
But, this is no new money venture. It is striking in its ignorance. Peppercoin ignores all the lessons of the past, in so complete a fashion, that one wonders what they were thinking?
It has been very clear since about the late 90's that the retail model is bankrupt. Both Paypal and e-gold - the two successful money models so far - cracked this problem in innovative ways. Yet Peppercoin decided to ignore their work and go back to the merchant-consumer model.
It's also been more or less clear that the downloaded client model is also a dead loss. I personally have been guilty of belatedly recognising that, and in the late 90s we rectified at least our understanding, if not our technology line. (The XML-X project was our answer to that.) There are ways to make the downloaded client model work, but they require integration with the application in a way that is decidedly absent in the peppercoin model.
A further delito is the micropayments trap. Simple mathematics will show that micropayments don't work. Simply take any given merchant, and calculate the most possible number of transactions, multiple by the low amount of each transaction, then work out how much revenue you got. Digital and IBM already discovered this at a cost of countless millions, and you can too, with a $5 pocket calculator.
The only thing left is that Peppercoin has some sort of secret weapon. Always possible, and always unlikely. Except them to raise another round, and then get absorbed somewhere and quietly forgotten.
This perceptive remark was made by Hasan (Martin Bramwell) in a private document. Actually, he said that the keystone of the issuance is the contract! So I am toying around with the phrase to see what rings the loudest bell.
No matter, they are Hasan's words. And, it is a remarkable observation that is worthy of deep attention. Consider this - can you find another project that pays even lip service to the contract in its architecture?
I never have. We invented the Ricardian Contract back in 1995, and at the time, even though we announced its form and discussed it widely, we fell into the trap of assuming it was too obvious. Indeed, that's what people told us, lulling us into its obviousness!
We actually thought that there was no point in pressing the place and case of the contract in Financial Cryptography, because fairly soon, all and sundry would sweep up the obvious construct, and our "first" would become just another forgotten footnote in the rubble of FC history.
Yet, none of that came to pass. Even though every small fact in this construct is easily established, just like static physics, and every piece of logic stands strong, the resultant archway appears too tall to see.
Why is that? It's not as if the contract is hard to understand. You take some text, you shove in some parsable elements, you sign it with OpenPGP's cleartext signature, and you hash the document. Really basic crypto, as it should be.
That then becomes the starting point for ... everything!
Maybe, if it's not in the construct, it's in what we did with it, that the mystery lies. Like a keystone, we built an entire aquaduct of governance over it. We took that hash, and tied it into the servers and the transactions and the repudiability. We took the signature and tied that into the Issuer. We took the text and tied that as a contract into the reserves.
And, we took the hash again and showed how the user was now part and party to the contract.
And... And...
Maybe our emphasis is wrong. Instead of looking at the keystone, we should be looking at the arches. Or, maybe the topdown view of the edifice is preferred, and how we got to the top of the world should be covered with hand waving and press releases.
Whichever. The water of governance flows without pause because it rides over something built around the keystone of a contract. The Ricardian Contract supports a civilisation of Financial Cryptography in a way that makes one realise that these are words yet to be appreciated.
Why is there no layer for Security in FC?
(Actually, I get this from time to time. "Why no X? ?!?" It takes a while to develop the answer for each one. This one is about security, but I've also been asked about Law and Economics.)
Security is all pervasive. It is not an add on. It is a requirement built in from the beginning and it infects all modules.
Thus, it is not a layer. It applies to all, although, more particularly, Security will be more present in the lower layers.
Well, perhaps that is not true. It could be said that Security divides into internal and external threats, and the lower layers are more normally about external threats. The Accounting and Governance layers are more normally concerned with the insider threat.
Superficially, security appears to be lower in the stack. But, a true security person recognises that an internal threat is more damning, more dangerous, and more frequent in reality than an external threat. In fact, real security work is often more about insider threats than outsider threats.
So, it's not even possible to be vaguely narrow about Security. Even the upper layers, Finance and Vaue, are critical, as you can't do much security until you understand the application that you are protecting and its concommitant values.
Seen on the Agorics Site: One of the best ways to allocate goods and/or resources is to sell them using free market techniques and ideas. An auction is an excellent method of distributing goods to those who value them most highly. Auctions, however, are far more complex than most people realize.
Kate Reynolds has developed a series of articles for Agorics, explaining different auction types and some of the issues important in determining whether to use auctions and, if so, which kind. What exactly is an auction? You may think you already know. Then again . . .
http://www.agorics.com/Library/auctions.html
Copyright 1996, Agorics, Inc.
There are approximately three conferences that specialise in FC that I know of. IFCA's FC, Digital Money Forum, and EFCE (Edinburgh Financial Crypography Engineering). These are listed in an Events Circuit which is located here:
http://www.financialcryptography.com/content/circuit/
in the knowledge base.
Financial Cryptography was the original. Back in '96, Bob Hettinga coined the term, invented the conference, and swept the driveway of snow all in one fine Boston winter's morning.
He conspired with Vince Cate and Ray Hirschfeld to run the first peer-reviewed Financial Conference in 1997 on the Caribbean island of Anguilla. An outstanding success, in many ways the first FC was the only FC, as a large bevy of legal professors and finance wonks turned up to challenge the crypto geeks on a variety of challenging subjects. Later FC conferences reduced themselves to cryptography, security and rights protocols, although the newest - FC'04 - has opened itself up to the temptation of "Systems and Finance Sessions".
Digital Money Forum was started by Dave Birch, one of the foremost FC thinkers. He created a high-level all-aspects approach that brought a lot of diverse people together. The breadth of the conference in many ways mirrors the diversity of FC, although this also works against the conference in impairing the ability to drill down in the short 2 day timeframe. It's by far the best place to get an broad-brushed introduction to the subject.
Rebel FCers Rachel Willmer, Fearghas McKay and Ian Grigg started Edinburgh Financial Cryptography Engineering - EFCE - to concentrate on the technical aspects of FC. As a forum for techies showing stuff, there were a few rules: presenters had to show running code, and presenters got a deep discount on price. EFCE was - for the practical implementor - wildly successful, especially as we measured a 25% deal rate. Less wild, EFCE only ran twice.
A special mention also goes to Bob Hettinga's Digital Commerce Society of Boston's monthly meetings, now apparently on sabatical, and the DBS symposiums in 1997 and 2001.
How do we measure success in a cryptographic protocol?
Many talk as if it were ordained. This is a resort to religion. There are others that follow the words of their betters. Perhaps runes are cast, tea leaves remained, palms scanned.
All of this remains uninspiring. I mean, in a religious sense, where is the beauty in listening to someone telling you, "Believe, else yea be struck down!"
There has to be some science, some objectivity to this question. Why is it that one crypto protocol rises and another sinks? How can we measure this? How can we decide what is succesfull or not?
This is no mere sidelines question. No fodder for Tired Journalists. If we don't understand what makes a security protocol lead itself and ourselves to success, then how can we write the next one?
I propose these measures:
a. nunber of design "wins" - something that catches the eye. Press releases, deployments, applications that bought in to the secuity vision. They must have done so for a reason, their choice is tangibly measurable by us outsiders.
b. penetration into equivalent unprotected market. This is the easiest. If we have an alternate already in place, find some easy measure of comparison. How many people switch over?
c. number of actual attacks defeated. Now, this may seem like an imponderable, but it is possible to draw upper and lower bounds. It is possible and fruitful to estimate based on analogues.
d. subjective good, as at the application level. That is, a security protocol is naked without its application - what good has it delivered to its masters?
e. placebo effect - the inspiring of the user community to move forward and utilise the system, regardless of the real security so delivered. (This last one is subtle, but very important, as several people have commented).
These are all measures that can be applied externally, without need to worry ourselves over the goodness or otherwise of the cryptography.
From the list, we can exclude such worthless measures as
* deployed copies,
* amount of traffic protected,
* opinions of experts,
We need as professionals, objective, measurable metrics. Measure on!
Can FC be Blogged? Can Blogs be FCed?
Financial Cryptography is a field of some complexity. It's as if 7 rivers come to one point, the result is a maelstrom of froth and turbulence. Most come boating along with their parasols and glasses of champagne is if it was a fine summer's day at Cambridge.
Only to spin and drown in the whirlpool. But others ride the experience, either through luck, statistics or adriotness. Why are some lucky and not others?
Blogs themselves have their image of chaos. Are they an appropriate tool for FC?
Blogs appear to be a dynamic posting experience modelled after the slashdot forum, with the individualism and customisation of ez.
