In 1998, Paul Krugman predicted that by 2005 it would be clear that “the Internet’s impact on the economy has been no greater than the fax machine’s.”
The prediction was so wrong and so widely circulated that Snopes has a page fact-checking the claim and affirming its veracity.
The internet is a vast place, but one would be hard-pressed to find another prediction that missed so badly. This is why I was surprised to stumble across a 2015 prediction on bitcoin that whiffed just as wildly.
Coincidently (or perhaps not), this comment also comes from Krugman.
Bitcoin a ‘Bubble’ Rooted in ‘Libertarian Ideology’
During a July 2015 roundtable discussion, Krugman was asked for his take on “disruptive digital currencies such as bitcoin.”
In a rambling two-and-a-half-minute response, Krugman described bitcoin as a currency rooted in “libertarian ideology,” a bubble that was just waiting to pop.
“It’s a technically sweet solution to a problem, but it’s not clear that problem has much economic relevance,” the Nobel Laureate explained.
The problem is, it’s clear Krugman didn’t understand those technical issues. He goes on to compare bitcoin to credit cards.
“If you’re looking for the idea that a currency doesn’t have to be something physical, it can be something virtual, that’s the system we already have,” he says. “If I want a way to make payments electronically, that’s, you know, credit cards.”
Krugman’s response suggests he had not actually studied bitcoin and didn’t really understand its value proposition or unique properties. Bitcoin has many of the same attributes as fiat money—it is easily transferable, divisible and fungible—but unlike fiat money, its supply is predictable and strictly limited.
“Hubris among intellectuals isn’t exactly unheard of, but it’s a bit astonishing coming from Krugman, whose history is replete with whacky predictions and bad advice.”
By design, bitcoin is increasingly difficult to create (“mine”). And, we know for a certainty that just 21 million bitcoins will be produced. This inherent scarcity makes bitcoin a far more durable form of currency than fiat money, an attribute that has nothing to do with credit cards.
Instead of discussing the attributes of bitcoin or even going into its weaknesses, Krugman mostly scoffs at cryptocurrencies and offers this bit of financial advice.
“Bitcoin looks like it really is a bubble in multiple senses,” Krugman says. “Certainly, [there’s] not a reason to hold that currency.”
If You Had Ignored Krugman’s Advice and Bought Bitcoin
If you listened to Krugman and decided to not buy bitcoin in 2015, you probably feel a bit like Blockbuster after turning down a $50 million offer to buy Netflix.
When Krugman made this prediction in July 2015, bitcoin was trading at roughly $300. On Thursday morning, bitcoin was trading at $47,500. This means that if you decided to ignore Krugman’s advice and buy 25 bitcoins for $7,500, you’d have nearly $1.2 million today.
“To be fair to Krugman, predicting the future is hard. We live in a complex world with infinite moving parts. But we should acknowledge that.”
Let’s look at it another way. Krugman was earning a $225,000 annual salary from City University of New York in 2015 (to study income inequality), a sum that does not include earnings from other ventures (book royalties, his New York Times column, etc.). If for one year Krugman bought bitcoin instead of stocks with ten percent of his income (pre-tax), he could have purchased 75 bitcoin for $22,500. That single investment would have netted him a $3.6 million profit.
Acknowledging the Limits of Knowledge
To be fair to Krugman, predicting the future is hard. We live in a complex world with infinite moving parts. Our knowledge of the world—systems, choices, products, risks, etc.—is limited.
But we should acknowledge that. This awareness, the Nobel Prize-winning economist F.A. Hayek pointed out, will in turn teach us a certain amount of intellectual humility.
“To assume all the knowledge to be given to a single mind…is to disregard everything that is important and significant in the real world,” Hayek wrote in The Use of Knowledge in Society.
“Krugman’s response is stark contrast to how fellow progressive Noam Chomsky responded when asked about bitcoin during a 2015 interview.“
Alas, admitting the limits of knowledge is not something Krugman is known for. And it comes through when he all but sneers when asked about bitcoin, provoking laughter from the audience and the moderator.
This is a stark contrast to how fellow progressive Noam Chomsky responded when he was asked about bitcoin during a 2015 interview. Chomsky expressed skepticism, but he also acknowledged he hadn’t studied bitcoin closely.
“My first mind is that I don’t know enough to answer,” Chomsky said. “I looked into it to an extent, and the guesses seem to be pretty uncertain.”
It’s a far more refreshing answer than Krugman’s glib take.
Hubris among intellectuals isn’t exactly unheard of, but it’s a bit astonishing coming from Krugman, whose history is replete with whacky predictions and bad advice that turned out to be rather embarrassing. This ranges from a 2002 plea to intentionally create a housing bubble to fight recession (how did that housing bubble work out?), to empirical failures of his macroeconomic models, to the aforementioned claim that the internet’s economic impact would be “no greater than the fax machines.”
Again, it’s okay to be wrong about things. We’re human, we all make mistakes. But recognizing this basic truth should breed humility, not arrogance, and the ability to admit when we’re wrong.
Bullish on Bitcoin
Krugman remains a crypto skeptic, evidenced by columns in 2017 and 2018, and that’s okay. At least it looks like he’s done more homework since then. His primary hang-up is the idea that bitcoin is “untethered” in contrast to gold (which has intrinsic value) and fiat money (which is backed by government promises).
“If speculators were to have a collective moment of doubt, suddenly fearing that Bitcoins were worthless, well, Bitcoins would become worthless,” writes Krugman.
This is true, of course, but it could also be said of any currency (even gold).
I’ll admit that I had similar skepticism about bitcoin for years. Its value as a flexible but durable currency designed to be scarce was elusive and difficult to fully believe.
I don’t feel that way anymore. The value proposition as a durable currency resistant to inflation is real, especially at a moment when fiat money looks precarious because of mass pumping.
I bought my first crypto this week. Time will tell if the investment was wise or foolish.
But I promise one thing: If I’m wrong, I’ll admit it.
This article originally appeared in Fee.