By Daniel Sutter

When I was young our elementary school classes would take field trips to Greenfield Village and the Henry Ford Museum in suburban Detroit. There we could see history come to life: we could watch blacksmiths make horseshoes, tour one of Thomas Edison’s labs, and see some of the earliest horseless carriages. Today the online payment system Bitcoin offers us a glimpse of economic history and an important economics lesson.

Bitcoin is a distributed online payment system established in 2009. In contrast to systems like Pay Pal, no third party keeps a ledger of who has how many Bitcoins. Rather a public ledger contained in the code of the system and kept by all the computers of participants tracks the coins and prevents double spending.

The Bitcoin payment system should compete with traditional credit card companies. Merchants pay a 3% fee for every credit card purchase, plus other fees. Credit cards constitute a significant cost for small businesses, which nonetheless bear these costs to offer customers the convenience. Processing fees with Bitcoin will likely be 1% or less. Bitcoin can also lower the cost of international money transfers, benefiting immigrants who send money home to their families.

More businesses are accepting Bitcoin. Overstock.com recently made headlines as the first major online retailer to do so, and fans of the Sacramento Kings basketball team can now buy tickets using Bitcoin.

Slowly Bitcoin is looking more like money. Economists recognize that money serves several functions in the economy, the most important being serving as a medium of exchange, meaning something that is widely accepted as payment. Identifying the roles money plays in an economy allows us to recognize that many different things have served as money at different times and places. So we know that gold, silver, tobacco in colonial America, and cigarettes in World War II prisoner of war camps all served as money.

Governments control currencies today. Dollars are our currency because our legal tender law says that dollars must be accepted as payment for debts. In contrast with today’s government monies, Bitcoin appears new and risky: no government backs this payment system and requires its acceptance.

Yet history shows that money developed in economies long before governments got involved. Money emerged spontaneously to reduce the cost of barter exchanges, or the challenge of trying to trade wheat for apples or horseshoes for bananas. Gold worked as money because people would accept gold. No government or other authority ordered people to accept gold as payment. Rather, someone hit on the idea of buying and selling using gold, or silver, or tobacco, and others copied it as they saw it work. Governments took over money later on, using their control to capture some of the value created by money.

The emergence of money provides one example of a phenomenon that occurs often in both economics and human society generally, what economists call spontaneous order. The institutions of our economy, including the corporation, banking, insurance, accounting, and prices, in addition to money, emerged spontaneously. They spread across the economy because they worked – meaning that they made people’s economic lives better. Our market economy as a whole also operates in this way – nobody ever ordered people to start shopping at Wal-Mart or ordering from Amazon. Sam Walton opened his first store and it succeeded, leading him to open more stores.

No person designed our complex modern economy. Rather it results from the interactions between millions of people. Our economic institutions have become so complex because they were no longer limited to what one person designing the system could understand. As new practices spread, others could improve and not just adopt the practice.

The complexity of our market economy far exceeds the ability of anybody, including government bureaucrats or economists, to understand or direct. This of course does not stop politicians and bureaucrats from thinking they are smart enough to, say, redesign our health care system.

Every time another business decides to accept Bitcoin, we see a kind of reenactment of economic history. We are observing first-hand the spontaneous emergence of a new economic institution to improve our lives.

 

 

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University. Respond to him at dsutter@troy.edu and like the Johnson Center on Facebook.