The Nash Trap for Economic Paradigms
By: Jon Gulson
Tags: Economics, Bitcoin, Nash Equilibrium, Keynes, Central Banking

John Maynard Keynes

The basic mapping of modern economic paradigm transition would begin with the gold standard, moving to Bretton Woods — where the dollar pegged to gold after world war two, with all other major currencies pegging to the dollar — leading to the Nixon shock of 1971 and exchange rate management; and finally ending in the inflation targeting era experienced today.

Hindsight allows us the benefit of understanding why each paradigm shifts into another. John Maynard Keynes is a rich source to this regard and how he spoke to inter-relational stability and the wider social benefits of peace, growth, and prosperity.

It may be obvious to say Bitcoin is the next paradigm. However Bitcoin faces problems in this respect: it’s inelastic, has poor consumer take up, and exists in a time where currencies freely float against each other since Central Banks are mandated to influence price level stability and not exchange rates.

Brexit and the Nash Trap

Nash Equilibrium is a tenet of game theory which states no participant unilaterally gains by deviating from their existing strategy: so players take into account not only their own interests when acting, but also those of the group.

Equilibrium is said to be reached where participants choose their best position based on what everyone else is doing.

It is said the United Kingdom in leaving European Union membership has fallen into the Nash trap because it’s a situation arising in competition and conflict where parties are unable to communicate or collaborate.

Restoring bridges or pathways toward cooperation therefore require a shift in how trust is framed and achieved. In this light it’s been noted how invisible asymptotes limit inflation targeting, even if its constraints aren’t yet constricting.

We Awoke to Find All the Old Gods Dead

“the difficulty lies, not in the new ideas, but in escaping from the old ones.” John Maynard Keynes

Change can happen more or less gradually or in a slice and it’s suggested Bitcoin may provide an asymptote for exchange rate volatility in the way formulated through John Nash’s Ideal Money and Asymptotically Ideal Money:

However, this doesn’t remove the problem that Central Banks aren’t remitted with exchange rate relationships. In this light, this tweet offers an insight into the removal of (inflation) postulates, again from Nash — that a paradigm may be similar but not associative:

This is to say, if Bitcoin became apparent as an expression of growth preference among populations — such an expression could be regarded as potentially inflationary (a “bubble”) by those who observe inflationary indications.

Turning this around however, it’s also said if Central Banks target circa 2% inflation, there is a logic to suggest 0% would be ideal in respect of money quality. This logic could be expressed as such:

It’s also been observed this is what Nash implied in Ideal Money and Asymptotically Ideal Money: that as sovereign monies converge and effectively de facto singularise (reach equilibrium) as a standard, the notion of inflation itself would redefine from one that is trust corrosive, to one which implies [global] growth in the way a tyre is pumped with air or lungs fill with oxygen.

At the moment, Bitcoin is something of a trust and honesty abstract — requiring a spark to become a meaningful expression of [such] a growth preference. It has been conjectured the award of legal damages correlated to hash power may provide this [spark], but as Keynes said, the difficulty lies in escaping the old ways.

It’s appropriate in such a light to finish with a line from F. Scott Fitzgerald: