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From Traditional to Digital School of Economy: The Cantillon and Nakamoto Effects in Finance Explained

Emergence of the Nakamoto effect in the modern economic theory

The Nakamoto effect emerges as a groundbreaking principle, distinct from traditional financial norms. Named after Bitcoin's mysterious creator, Satoshi Nakamoto, this effect represents a new era of financial equity. Unlike the old systems, where your wealth and status could influence your economic benefits, the Nakamoto effect introduces a merit-based reward system within the Bitcoin universe.

Simply put, in the realm of Bitcoin, it's not about who you know or where you're from; it's about what you contribute. Miners, or participants in the Bitcoin network, secure transactions and, in return, receive newly minted Bitcoin and transaction fees. This system ensures that rewards are based on the value of the contribution, not proximity to power or privilege.

This revolutionary approach questions the necessity of traditional currency, often criticized for being a tool for the elite or a mechanism for illegal transactions. Yet, this narrow view overlooks Bitcoin's potential to rectify the deep-seated issues of systemic inequity and corruption ingrained in our current monetary systems. By prioritizing contribution over status, the Nakamoto effect proposes a more equitable financial future.

The drawbacks of traditional currency

Diving into the core of our modern monetary challenges reveals the Cantillon effect, a concept often overlooked yet crucial in understanding financial inequity. Rooted in classical economics, this effect illustrates how money distribution directly influences individual wealth, favoring those closest to the source of new money—typically, individuals with privilege, status, or geographic advantage.

Our current financial system exacerbates this disparity by creating money primarily through bank-issued debt, enriching those at the top at the expense of the middle and lower classes. This process not only destabilizes the monetary system but also fosters a society dismissive of future consequences. Between 1970 and 2010, the world witnessed 425 banking, monetary, and debt crises, underscoring the volatility of a monopolistic monetary system.

In stark contrast, history shows that societies with diverse currencies experience greater stability and equality. The centralized creation and distribution of money have proven to be a fragile foundation for economic prosperity, highlighting the need for an alternative that escapes state control and the pitfalls of the Cantillon effect.

Cryptocurrencies, like Bitcoin, emerge as beacons of hope in this landscape. Born from the ashes of the 2007–08 financial crisis, Bitcoin offers a decentralized alternative that challenges the status quo. Unlike traditional currencies, where the flow of new money benefits a select few, Bitcoin's distribution is based on contribution and effort, laying the groundwork for a more equitable financial ecosystem.

Understanding Cantillon effects

The Cantillon effect, named after 18th-century economist Richard Cantillon, highlights a fundamental flaw in our monetary system: not all economic participants benefit equally from an increase in money supply. This effect underscores a disturbing reality—where new money flows first significantly impacts economic inequality.

Initially, Cantillon pointed out that those closest to the money's creation—like banks and financial institutions—enjoy the first use of new funds, giving them purchasing power before prices adjust to the increased money supply. Consequently, these entities can buy assets at lower prices, reaping profits as the economy adjusts and prices rise. This system inherently benefits the financial elite, while those further from the source of new money, often the general public, face diminished purchasing power and increased living costs.

This imbalance fosters a cycle of inequality, where wealth is systematically transferred from the middle and lower classes to the top echelons of society. The Cantillon effect thus acts as an unseen tax, penalizing those with fixed incomes or savings in depreciating currencies, while rewarding asset owners and those with direct access to newly created money.

Moreover, the Biflation effect, a variant of the Cantillon effect, occurs when central banks inject money into the economy aiming to stabilize asset prices. However, this often leads to increased costs for raw materials and basic goods, exacerbating the cost of living for the average person, akin to the effects of stagflation.

The Bitcoin solution to financial inequity

Bitcoin stands as a formidable challenge to the entrenched inequalities perpetuated by the Cantillon effect, presenting a system where value is distributed more equitably. Unlike the traditional monetary system, where new money benefits the already wealthy and connected, Bitcoin offers a decentralized approach:

Equal opportunity mining: 

In the Bitcoin network, anyone can become a miner, requiring just a computer and electricity. This accessibility ensures that rewards—new Bitcoin—are based on contribution to network security, not on one's proximity to the financial elite.

Decentralized issuance: 

Bitcoin's issuance is predetermined by its algorithm, occurring every 10 minutes as a reward to miners. This process is immune to lobbying and political influence, making it fairer than the traditional system where money creation is centralized and opaque.

Bitcoin's system effectively sidesteps the issues central to the Cantillon effect by ensuring that the creation of new money is removed from political influence and is instead tied to the provision of a valuable service: securing the network. This not only democratizes the process of money creation but also rewards those who contribute to the overall stability and security of the system, regardless of their geographical location or socio-economic status.

Furthermore, Bitcoin's transparency and predictability in issuing new coins contrast sharply with the often arbitrary and secretive processes of central banks. This transparency fosters a level of trust and stability not found in traditional financial systems, where the rules can change based on political whims or economic pressures.

Safeguarding wealth against the Cantillon effect

Protecting oneself from the uneven consequences of the Cantillon effect involves rethinking traditional approaches to wealth and currency. Historically, money's value was tied to tangible assets like gold, which governments cannot easily inflate. Bitcoin, in the digital age, extends this principle of scarce, labor-intensive resources into the realm of cryptocurrency, offering a modern means to circumvent the inequities of fiat currency systems. Here's how individuals can shield their wealth:

Investing in non-state money: 

Bitcoin and gold represent forms of money that are not subject to government control or inflationary policies. By allocating wealth into these assets, individuals can protect their purchasing power from the erosion typical of fiat currencies.

Decentralization and security: 

Bitcoin's decentralized nature means that it operates beyond the reach of centralized financial systems and the distortions of the Cantillon effect. Its cryptographic security also ensures that ownership and transactions are protected.

Transitioning to assets like Bitcoin or gold is not just a financial decision but a philosophical shift towards recognizing money's value as independent of governmental decree. This approach represents the most direct method to opt out of the traditional monetary system's pitfalls, offering a peaceful transition to a more equitable financial paradigm.

In embracing Bitcoin, individuals not only protect their wealth from inflation and systemic inequity but also contribute to a new financial system that values transparency, equity, and the democratization of money. This shift not only safeguards individual wealth but also supports the broader movement towards rectifying the financial imbalances of our time.