Tyler Cowen has a thought experiment on Bitcoin and the usual suspects are vibrating in ecstasy over it. Bitcoin has become a religion for most of these people. That means they have lost the ability to see the enterprise in rational terms. When they see things they like, they start singing the songs that celebrate the cult. When the see things they don’t like, they began chanting the incantations that are supposed to make the bad men go away. The comments sections of Bitcoin stories look like something from the local lunatic asylum.

The basic thrust of Tyler’s post is that Bitcoin is like any other commodity. Once a sufficient number of others get into the cryptocurrency racket in sufficient numbers, the price for all of these “currencies” falls to cost plus some tiny profit. Why anyone would consider something that functions like this a currency is never addressed. Tyler just treats Bitcoin like any other producible commodity, sort of a fusion of gold and some cheap manufactured good. Since the currency has no intrinsic value and no authority to set the value, the market sets the value based on utility, I guess.

Putting aside my complaints about Bitcoin as a currency (I think it is a clever reinterpretation of Pet Rocks), the main problem with these cryptocurrencies is the same problem we saw in the Free Banking Era. Central governments hate the idea of a currency they cannot easily manipulate. That has been true since Pheidon. If you control the money, you control the people. Naturally, ruling elites will seek to control the money as a top priority. It has nothing to do with economic efficiency and everything to do with order. Order is what allows the best citizens of the polity to rise and remain at the top of the status system. It is also what allows the less talented to live something close to a sane existence. Order is how humans guard against the anti-social fraction that exists in every human population.

This natural desire for order naturally leads to a ruling class that is the final authority. That authority, in order to be an authority, needs a method to control the people and thus the society over which they rule. Controlling the money is the most efficient way to accomplish this. Controlling land or monitoring individual transactions is unworkable over the long haul. The Soviets found this out after 70 years of Marxism. A simple way to control the populace is through the coining of money. That makes taxing easier for the authorities and it gives them control of trade and labor. It allows for the authorities to audit the citizenry to ensure compliance. Having a raft of competing currencies defeats these attempts and therefore can never be tolerated.

Think about it this way. Let’s say I come with a digital heroin. That is, a drug that can be transmitted on-line that you load on a flash drive, shove up your ass and get high for eight hours. Obviously, I’m not getting a lot of takers initially. The cost of making it is, for the sake of this example, cheaper than getting real heroin on the wholesale market. But, the lack of customers means I’m losing money every time I make a batch. Heroin addicts are not on-line so I go to where they are and start selling my new drug. I manage to get a few takers to try it and begin to build a client base through word of mouth. I hit the same spots at predictable times and sell my digital heroin the old fashioned way, but it is not illegal so I can do it at the mall or Starbucks.

This goes on for a while and no one is the wiser. The cops don’t care as it looks nothing like criminality from their perspective. The drug gangs don’t care at first because I’m not doing business on their turf. They are unaware of the threat I pose initially. But, they notice a drop in sales eventually as I build my business and they begin to make inquiries. Eventually they will figure out that someone is taking their customers. They may figure out it is me before they figure out what I’m selling or it may be the other way around, but at some point they put it together. They are losing control of their drug market because some outside group is selling a new product.

The drug gang will have three choices. They can kill me, but that will require knowledge they may lack. I could have advanced to the point where I’m selling my drug on-line. Drug dealers are not fools and they will recognize their lack of knowledge and see that as a risk in itself, perhaps a bigger risk. Killing me could create unknown problems. The other choice is to figure out what I’m doing and that means muscling in on my business. There is a reason we have such an array of street drugs. A clever guy creates a new product and the drug gangs eventually take it over and add it to their portfolio. The same guys controlling the weed sales in one area control the heroin sales too.

The third option is to enlist the state to take out my business. I’m conducting business and that means taxes are involved. It also means a mountain of rules and regulations. My drug may be legal, but not paying taxes on sales is illegal. Not filing for a business license and not abiding by the laws governing record keeping are against the law. If I have employees, then I need to pay them and that means taxes, workplace laws, social security, Medicare and unemployment taxes. As any small businessman knows, the state can shut you down on a whim.

Here we ultimately see the problem with Bitcoin. We are back to where we started. Disruptive technology is not ignored by the folks at the top of the established order. In the drug example, the established authority is the drug game, which served as a proxy for the state. In the above ground world, the state will defend itself from the threat posed by Bitcoin and they have many tools at their disposal. They also have tanks, planes, missiles and other military goodies. Bitcoin can only exist as long as the state allows it to exist. That means it will have to serve the interests of the state to survive, which brings us right back to where we are now.