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Are Bitcoiners Rational Economic Agents?

Last Updated March 4, 2021 4:47 PM
Justin OConnell
Last Updated March 4, 2021 4:47 PM

Bitcoin and blockchain technologies have big visions of changing the macroeconomics of the financial system. Less investigated, the microeconomics of Bitcoin could supply us with unique insights into how the Bitcoin digital financial complex might evolve.

Microeconomics examines decision-making by economic actors, like firms and consumers, in their myriad organizational possibilities, from unions to entire industries to other defined organizations. Microeconomists are concerned first and foremost with decisions by people and organizations, and thus, in a bigger sense, the decision-making mechanisms in a market setting.

Systematic study of blockchain systems such as Bitcoin has depended upon understanding the phenomenon of distributed digital currency in the context of centuries long financial traditions, not as open systems comprised of agents with emotions, rationality, irrationalities and self-interest. In microeconomics, these participants are often represented within mathematical models in the context of production, distribution, goods and services. In microeconomics, the prediction of future human action, and the evidence to support the claim, is important.

A problematic axiom of many academic microeconomic theory is the presupposition of rationality. If humans are not rational, then their behavior is not predictable, and thus a main goal of modern microeconomics goes challenged. What should, in fact, be standard academic fare – the questioning of a discipline’s axioms – is a sign of a healthy academic approach to a question. Occam’s Razor has traditionally been a technique of microeconomic theories.

Just how rational economic agents are has come under contention. John Wolpert, a  lead on IBM’s blockchain research, evokes ISIS in explaining away the myth that all economic actors are rational, something which Austrian economists – perhaps the most vocal contingent of the Bitcoin creation community – also assume in the context of free-market theory.

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Bitcoiners like to pre-suppose that all participants in cryptocurrency and blockchain systems will act rationally based on the rational choice theory. The theory assumes actors are rational agents who consider information and costs and benefits to chose the best action. Many modern crypto-currencies assume that, because an economic actor in the system holds a particularly cryptocurrency, he or she will act in the best interest of the system.

Homo economicus also refers to economic theories in which humans are considered rational characters with self-interests. The notion differs from behavioral economics which gives some room for irrationality. There is another theory, homo reciprocans, which emphasizes human cooperation.

Used for the first time in the late nineteenth century by critics of John Stuart Mill’s work on political economy, the term economic man was a riposte to a Mill’s quote:

[Political economy] does not treat the whole of man’s nature as modified by the social state, nor of the whole conduct of man in society. It is concerned with him solely as a being who desires to possess wealth, and who is capable of judging the comparative efficacy of means for obtaining that end.

Mills goes on: “an arbitrary definition of man, as a being who inevitably does that by which he may obtain the greatest amount of necessaries, conveniences, and luxuries, with the smallest quantity of labor and physical self-denial with which they can be obtained.” Are virgins after death an economic incentive? 

In The Wealth of Nations , Smith wrote:

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

I’m sure we’ve all eaten the food of a lazy chef. Aristotle’s Politics  also discussed self-interest:

Again, how immeasurably greater is the pleasure, when a man feels a thing to be his own; for surely the love of self is a feeling implanted by nature and not given in vain, although selfishness is rightly censured; this, however, is not the mere love of self, but the love of self in excess, like the miser’s love of money; for all, or almost all, men love money and other such objects in a measure. And further, there is the greatest pleasure in doing a kindness or service to friends or guests or companions, which can only be rendered when a man has private property.

There are lots of real world examples of actors not acting in their self interest. Like lazy people. Furthermore, with Ethereum and Bitcoin participants lamenting the notion that miners are consolidating influence on the network, the guarantee that these individuals will work strictly rationally, in the interest of themselves and thus the system, might be false assumption. What if a highly motivated economic actor wants to behave essentially as the equivalent of a crypto-kamikaze pilot, in the process losing himself, as a Bitcoiner, his crypto-fortune? What economic model explains that?

In 2013, The Atlantic  wrote an article on how consumers are irrational. As Daniel McFadden states in the article: “Many of our mistakes [as humans] stem from a central ‘availability bias,’ he said. “Our brains are computers, and we like to access recently opened files, even though many decisions require a deep body of information that might require some searching.” In the interview, he goes on further:

“The third check against the theory of the rational consumer is the fact that we’re social animals. We let our friends and family and tribes do our thinking for us. In a fascinating example, McFadden presents a study that shows Korean peasant women within the same village tend to use the same contraception — even though there is ‘substantial, persistent diversity across villages.’”

In psychology, the theory of “hyperbolic discounting” proposes individuals do not evaluate rewards correctly over time. “Nappers, procrastinators, Congress,” are some examples cited by McFadden. What these new directions for microeconomics implies for the Bitcoin online creation community remains to be seen.

Disclaimer: The views expressed in the article are solely that of the author and do not represent those of, nor should they be attributed to CCN.com.

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