TOPSHOT – Argentine President Javier Milei arrives to give a speech at the World Economic Forum… [+] (WEF) met in Davos on January 17, 2024. (Photo by Fabrice COFFRINI/AFP) (Photo by FABRICE COFFRINI/AFP via Getty Images)

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The exciting news of Javier Milei’s election in Argentina last year received widespread acclaim across the Bitcoin community and libertarian circles. Argentina’s decades of hyperinflation should lead to natural skepticism about excessive central bank money printing, and it is reassuring to see that policy can follow this basic logic. This was a huge victory for the solid monetary movement, of which Bitcoin is a part. The election of the former television commentator as head of state is a warning to all central bankers around the world and a wave of hope that democracies can indeed control the power of government bureaucrats.

Argentina and modern macroeconomics

Argentina has also played an outsized role in the war of ideas waged in the academic economy over the last 30 years. The giants of this field, such as Robert Lucas, Thomas Sargent, and Ed Prescott, were all in the economics department at the University of Chicago.

Lucas presented the official critique of the central bank’s stabilization policy in his Nobel-winning article “Expectations and the Neutrality of Money”. He makes a technical contribution by establishing a new area of ​​mathematics applied to macroeconomics, following in the footsteps of John Muth. Lucas was a master storyteller and his main idea comes from a simple parable that even children can understand.

Imagine a community of people at a circus who magically receive an extra $20 bill in their pocket. At first, everyone is delighted with the new money and buys more cotton candy, roller coaster rides and hot dogs. New money now circulates throughout the circus, yet the total supply of goods and services remains fixed. Over time, prices only have one way to go: up. There may be some adjustment time, but the price increase is inevitable. And so purchasing power falls and the general price level will rise.

But here’s the problem: people are rational, so they know this will happen. So the moment everyone receives their R$20 bill, they know in advance that everything will end up being R$20 more expensive. And so it’s impossible to trick them into spending more now. In economic terms, these rational expectations will not lead to changes in real consumption. This was a broad critique against Keynesian economics, which argued that increasing the money supply can, in fact, deceive people. Keynesian economics gave carte blanche to central bankers to manage the money supply and try to induce economic growth. But Lucas argued that such an exercise is a fool’s errand. You cannot trick people into changing their real consumption or investment if they are intelligent enough to form rational expectations about the future.

The rational expectations movement took hold in the economy in the 1970s and 1980s, in the freshwater schools of Carnegie Mellon, the University of Minnesota, and the University of Chicago, as a pushback against the saltwater schools of Harvard and MIT. Lucas and Sargent often referred to hyperinflation in Argentina as a prime example of an out-of-control central bank. The University of Chicago, at the turn of the century, imported dozens of doctoral students from Argentina who had lived this daily experience of hyperinflation, in which prices change not quarterly or monthly, but weekly or daily. And it’s a sad story that, 25 years later, the same is true.

Rational Expectations and Bitcoin

It is a loss to academia that Robert Lucas has died, as he pioneered many of the early critiques of central banks. But how does rational expectation fit into Bitcoin? This response is subtle and nuanced. At one level, rational expectations are a strong criticism of central banks, just like Bitcoin. So they have a common enemy. Both criticize the bad choices that inevitably result from humans managing their own money supply. For Lucas, trying to stabilize the macroeconomy by changing the interest rate every six weeks is a waste of time and ineffective.

But the arguments in favor of Bitcoin go further. Bitcoin’s issuance schedule is a strong endorsement of a very specific type of money supply, which is predictable and immutable. In rational expectations, money doesn’t matter, because people are too smart to be fooled by changes in money. For Bitcoin, the money supply is important and it is vital that everyone knows the supply in advance and that it cannot be changed. So at some level there are different assumptions about people’s rationality. Lucas argued that people are too rational to be fooled by an errant central bank, while Satoshi assumed (in his protocol design choices) that people are not rational enough to fully adjust to bad central bank policies, which is why which a fixed and unchanging policy the money supply is better.

An erratic monetary policy, such as those recently adopted by central banks, can harm individual investors and destroy the social fabric. The rollercoaster of interest rates, which constantly oscillate between easy money and tight money, has a profound impact on an otherwise unknown but essential component of the economy: the allocation of our human capital. The search for income induces individual investors to bet on the stock market and young students to pursue careers in commerce rather than producing goods and services in the real economy. A fixed, unchanging monetary supply prevents these worst human instincts from taking over, just as a setting on your iPad prevents your children from spending too much time in front of a screen.

And so, although Argentina motivated the movement of rational expectations in academic economics, that movement has now come full circle. Bitcoin puts some decisions directly in the hands of individuals (such as mining a block or setting a transaction fee), but not all decisions (such as selecting the schedule for issuing new money). I believe that this is the right balance and is closer to what we can and should aspire to in our economic policies.

Argentina would be a great candidate for Bitcoin and would give the world a proof of concept that it certainly needed. But even if Argentina doesn’t adopt Bitcoin as legal tender, Bitcoin has still managed to frame the conversation around sound money, which will ultimately discipline central bankers in the future. Even if this is all Bitcoin does or does, for me it is still a resounding success. It is the only technology that has ever managed to keep the power of central banks in check.

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