Henry Hazlitt’s 1946 book Economics in One Lesson is regarded as a classic introduction to free market economics. Nobel prize winning economist Milton Friedman said of the book: “[Hazlitt’s] explanation of how a price system works is a true classic: timeless, correct, painlessly instructive.” The book’s titular lesson argues:
The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.
The entire premise of the book is found in this one sentence, and the chapters that follow are filled with examples of what happens when economic central planners focus on policy effects to one group while ignoring the secondary effects of their policies on all other groups. Hazlitt goes on to explain, in Chapter 17, the effects of governmental price fixing:
Let us first see what happens when the government tries to keep the price of a single commodity, or a small group of commodities, below the price that would be set in a free competitive market.
The argument for holding down the price of these goods will run something like this: If we leave beef (let us say) to the mercies of the free market, the price will be pushed up by competitive bidding so that only the rich will get it. People will get beef not in proportion to their need, but only in proportion to their purchasing power. If we keep the price down, everyone will get his fair share.
The first thing to be noticed about this argument is that if it is valid the policy adopted is inconsistent and timorous. For if purchasing power rather than need determines the distribution of beef at a market price of $2.25 cents a pound, it would also determine it, though perhaps to a slightly smaller degree, at, say, a legal “ceiling” price of $1.50 cents a pound. The purchasing-power-rather-than-need argument, in fact, holds as long as we charge anything for beef whatever. It would cease to apply only if beef were given away.
A similar situation exists in Bitcoin where the independent development team known as Bitcoin Core is artificially suppressing the cost of full-node operation — in effect, impeding free market forces. “This is for the benefit of the consumers,” they say, ignoring the effects of this policy on the >99.9% of Bitcoin users who do not run a full node. As Hazlitt notes, this line of thinking is inconsistent because, regardless of the price at which something is fixed, there will always be people who cannot afford it. The only sound logical conclusions to be drawn from this line of thinking are to either set the price at zero or to allow the price to be dictated by the free market. More tenuous still is the supposition that current full node users will be “priced out” by a block size increase.
But schemes for maximum price-fixing usually begin as efforts to “keep the cost of living from rising.” And so their sponsors unconsciously assume that there is something peculiarly “normal” or sacrosanct about the market price at the moment from which their control starts. That starting or previous price is regarded as “reasonable,” and any price above that as “unreasonable,” regardless of changes in the conditions of production or demand since that starting price was first established.
Bitcoin Core’s central planning inherently declares the cost of node operation today to be reasonable, but this is done without providing any hard data about which users are running a node, much less what their needs are, which costs they can bear, and so on.
In discussing this subject, there is no point in assuming a price control that would fix prices exactly where a free market would place them in any case. That would be the same as having no price control at all. We must assume that the purchasing power in the hands of the public is greater than the supply of goods available, and that prices are being held down by the government below the levels to which a free market would put them.
Now we cannot hold the price of any commodity below its market level without in time bringing about two consequences. The first is to increase the demand for that commodity. Because the commodity is cheaper, people are both tempted to buy, and can afford to buy, more of it. The second consequence is to reduce the supply of that commodity. Because people buy more, the accumulated supply is more quickly taken from the shelves of merchants. But in addition to this, production of that commodity is discouraged. Profit margins are reduced or wiped out. The marginal producers are driven out of business. Even the most efficient producers may be called upon to turn out their product at a loss. This happened in World War II when slaughterhouses were required by the Office of Price Administration to slaughter and process meat for less than the cost to them of cattle on the hoof and the labor of slaughter and processing.
In Bitcoin, block space is the commodity supply being artificially restricted. The producers of this commodity are the miners (although they do not produce a physical good, the analogy holds). Restricting the availability of the block space commodity indeed discourages the further production of such. New entrants into the Bitcoin mining business are thereby disincentivized: if the cost of producing a bitcoin has already reached its marginal level, then the profits available to new market entrants are not great enough to incentivize the risk-taking required of new mining operations. By dictating such policies and not allowing goods to be subject to the free-market-at-work, Core discourages new competitors and directly contributes to the centralization of mining!
If we did nothing else, therefore, the consequence of fixing a maximum price for a particular commodity would be to bring about a shortage of that commodity. But this is precisely the opposite of what the government regulators originally wanted to do. For it is the very commodities selected for maximum price-fixing that the regulators most want to keep in abundant supply. But when they limit the wages and the profits of those who make these commodities, without also limiting the wages and profits of those who make luxuries or semiluxuries, they discourage the production of the price-controlled necessities while they relatively stimulate the production of less essential goods.
The regulators wish to keep the ability of consumers to perform Bitcoin transactions in abundant supply, while simultaneously restricting the available supply of on-chain Bitcoin transactions. Thus the production of “luxuries” or less essential