I’ve always been fascinated and baffled by the relationship between smell and memory. All senses can remind me of past events, but a fleeting scent has the power to take me back farther, faster, and clearer than other sensory phenomena.

Today we were walking past beach houses and one was being rebuilt. Sawdust mixed with cigarette smoke hit me faintly for a split second. Snap. I was back. I could hear the crass lunch-break conversation, feel the slivers in my fingers, taste the half stale peanut butter sandwich I’d packed in my dirty plastic cooler. I travelled 18 years into my past to my old construction job. I loved that job.

Moments like these make me wonder where that detailed, crystal memory resides the rest of the time, and how exactly it was triggered and released to my conscious mind. What other memories and associated smells are in there, awaiting the correct smelling key to unlock them? Could I go through a smell catalogue to see what else I remember? If my nose breaks, are those memories lost forever?

Almost Everyone Misunderstands Rational Choice Theory

Pete Leeson’s wonderful new book, “WTF?!” (review coming soon) is cathartic reading.  Especially after reading some papers and comments by behavioral economists and their ilk recently.  Everyone loves to throw around examples of humans being “irrational” to prove that the economic method, or rational choice theory, is of limited application and doesn’t apply to real humans who aren’t calculating machines.

This is an elementary error in understanding what “rational” means to a (good) economist.  In common parlance, the word has a lot of meanings.  It’s loosely used to refer to reasonable, sound, understandable, or coldly scientific behavior.  In the context of rational choice theory, however, it has a much simpler meaning.  Rational action is any purposeful action taken to achieve an end desired by the actor.  Here, every deliberate action is rational.  Based on the preferences, information, incentives, and constraints an individual actor faces, they will act in a way preferable to perceived alternatives at the time of acting.

This understanding of rational choice is the foundation upon which Mises built his entire magnum opus, Human Action, and from it spring everything from demand curves to the structure of production.

When defined in this way, most people will dismiss the idea of rational action as useless.  It’s just a tautology.  Sure, whatever a person chooses must, by definition, be the thing they preferred to other perceived alternatives at the time of choosing, otherwise they wouldn’t have chosen it.  So what?  Isn’t that like saying ‘A is A’?

Yes, kind of.  And the law of identity is one of the most important tautologies in the world.  You can call it simple or obvious, but you’d better not ignore it or forget it is always and everywhere true.  It’s the same with rational choice theory.

Many of the same people who call it a useless tautology go on to make claims that contradict this ‘obvious’ truth.  Things like, “People are just crazy/irrational/greedy” and therefore outside the reach of economic analysis.  Or, “Humans have biases, therefore ‘homo economicus’ is unrealistic, therefore economics can’t explain human behavior.”  Of course economics never seeks or claims to explain motives, or why people have the preferences, information, incentives, or constraints they do.  It only seeks to demonstrate that, given these, their behavior is rational.

The power of this approach is staggering.  When “That’s just crazy” isn’t an option, humility and curiosity replace fear and ignorance.  If, given the preferences, information, incentives, and constraints, all purposeful human action is rational, we can’t get off the hook with hand-waving or invective adjectives.  We are forced to ask, “What are the preferences, information, incentives, and constraints facing this actor?”  That is where the real understanding comes!

If you want to see different actions, by yourself or others, you needn’t hopelessly appeal to “just because it’s the right/better thing to do”.  Instead, if you understand information, incentives, and constraints, you can try to alter them so that the rational choice for a given person’s preferences is closer to the choice you’d prefer.  It’s easy to see this in government policy, but it also applies to daily individual life.

Faith in Your Former Reason

I’ve always liked the description of faith not as believing something despite all evidence to the contrary, or believing something that conflicts with logic.  That’s just stupidity.

To me, faith is continuing to act on a belief you formed using your full logical powers in a moment when emotion tempts you to do otherwise.  It’s faith in your own ability to arrive at a sound conclusion, and faith in your former resolve to stick with it even when it becomes costly.

When you commit to diet or exercise or daily blogging, if you do so for sound reasons based on real knowledge of yourself, your goals, and a causal connection between those activities and your desired outcomes, you will need faith to stick with it.  There will be moments and days when the little voice says, “What’s the point of all this anyway?” or “One day off won’t hurt anything”.  In that moment, you won’t have a clear rejoinder.  You might be tired or drunk or angry, rendering your reasoning faculties sub-optimal.

It is in that moment that you need faith.  You must act on a firm belief that at the time you set the challenge before yourself, you were thinking clearly and you do have good reasons, even if not readily accessible in the height of emotion.

Faith is pro-reason, not anti-reason.

Bitcoin: Should the Functions of Money be Separate, or All-in-One?

Money is a lot of things.  Predominantly a unit of account, a store of value, and a medium of exchange.  We’re quite used to these functions being split up and handled by different tools.

Dollars are a medium of exchange in some countries.  They are a unit of account in some countries.  Sometimes they are one without the other, sometimes they are both at once.

Dollars aren’t really a store of value in the U.S.  If you have wealth, you put it into stocks, bonds, real estate, gold, antiques, or other assets or financial instruments, since the relative value of your cash in the bank is likely to decline.

In countries whose governments inflate faster than the U.S., dollars are sometimes used as a store of value, as are gold and a number of other things.  The problem of storing value is much more difficult in poorer countries and places with very onerous financial regulations and where most people are unbanked and lack access to financial services.  Wealth is literally inflated out of people’s pockets before they can do anything about it.

Bitcoin emerged as the ultimate money.  It satisfied the key criteria of money better than anything humans have used to date (Hard to counterfeit, uniform, divisible, scarce, durable, easy to store, portable).

The early coders who discussed and tested it had a grand vision.  They saw Bitcoin supplanting government controlled money and financial systems.  They believed it would unite the three main functions of money in one.  It would be a store of value, since it’s capped at 21,000,000 BTC, and even unbanked people can use it.  It would be a global unit of account, since borders and central banks couldn’t regulate it away like national currencies.  Soon other currencies and commodities would be denominated in BTC.  And it would be a medium of exchange, since no trusted third party is required to verify purchases, and it’s more divisible and portable than any currency to date.

The mind-blowing implications of uniting these three functions of money are fun to consider.  Can you imagine a world in which Keynesian schemes to stimulate spending and sap savings fail, because people see the real value of holding BTC vs. spending it?  The capital accumulation available to all would be immense, and consumption would be weighed against the real cost, not obscured by artificially cheap credit and devaluing currency.  The simplicity of accounting and global trade would be nuts.

But this might not be possible.

As Bitcoin grew, it seemed harder to imagine it uniting all three key functions of money.  Many people saw a choice.  Whether or not it’s adopted as a unit of account, it had to choose one of the other two attributes.  It could be a store of value or a global medium of exchange.

Why the choice?  Bitcoin requires a lot of computing power to verify transactions.  This is one of the things that makes it hard to counterfeit and free from trusted third parties.  To be used as a global medium of exchange, Bitcoin would have to process thousands of transactions every second.  This means larger “blocks” of data to be handled be miners, which would lead to larger server farms or mining pools handling most of the network.

Many fear this kind of agglomeration would threaten the security and freedom of Bitcoin, as bad actors or governments would have fewer parties to bribe or coerce.  To remain as distributed as possible, the blockchain must maintain small blocks and therefore can never process more than a few transactions a second, with higher fees and confirmation times too slow for daily commercial exchange.

This is the tech objection to Bitcoin as a global medium of exchange.

There is an economic objection as well; a belief that the increasing value of BTC means no one will ever want to spend any so it can’t be used for small exchanges.  This objection falls apart rather easily, as there is a positive time value to money, and people won’t starve to death with a wallet full of BTC.  Spending may not be as profligate as it is under rapidly devaluing currencies today (this is not a bad thing), but spending would still occur and market rates for spending vs. holding would emerge, as well as ways to borrow against your BTC so you could spend now while not losing future value tomorrow.  Also, just as people spend, they would also be earning.  It’s not as if people today only ever lose cash holdings.  They add to and detract from them regularly.

Is the tech objection a deal-breaker for the bold dream of an all-in-one money?  Probably not.

There are two main solutions currently being debated by people in the Bitcoin community. (I don’t recommend weighing in unless you are prepared for comical levels of invective and ad hominem.  It turns out, people are very emotional about which of these two solutions might work better).

The first approach is to accept that Bitcoin itself will always only be a store of value, or sort of reserve currency for the world in ways similar to gold, but more portable.  It will be a “settlement layer” undergirding the global financial system, replacing clearing houses and other mechanisms used by banks to make large transfers.  The high fees and slow confirmation times mean transactions more numerous or smaller than these massive settlements don’t make sense.  Some businesses are using Bitcoin in this way already today.

Under this approach, while Bitcoin itself wouldn’t be used as a global medium of exchange for daily purchases, it would provide a backbone upon which additional layers of fast, low cost, efficient payment processing could be built “off-chain” and only occasionally settled on the big blockchain.  Any number of Altcoins or Bitcoin apps could be used as payment processors, just as today we use myriad forms of payment processing for dollars (credit cards, PayPal, gift cards, store credits, etc.).

The second approach is to increase the size of blocks mined on the network so that Bitcoin can handle thousands of transactions per second.  This seems to be the idea that the original inventors of Bitcoin had in mind, as they assumed that computing power would continue to increase and that large agglomerations of miners would not be a major threat, as their economic incentive was to keep Bitcoin valuable, and allowing any kind of take-over would destroy it and their own ability to profit.

The two approaches above are, from my understanding, what led to the ‘hard fork’, when a new currency called Bitcoin Cash split from the main chain to continue down the path of larger and larger blocks to keep transactions fast and cheap with the vision of becoming both a store of value and a global medium of exchange.  The other chain, sometimes called the legacy chain, instead added something called SegWit that helps improve speed and lower fees, but doesn’t increase the block size…at least for now (there is a debate raging about whether to double the block size on the legacy chain, or hold it constant at 1MB.  Bitcoin Cash has an 8MB size and, from my understanding, it will continue to increase as needed).

I have no idea which approach is better.  Luckily, I don’t need to know.  We have both experiments, and probably more to come, so the individuals in the market can try them out and different solutions will emerge for different problems.

One interesting note is that both approaches want a money free from government control.  Both claim (for good reason) to be continuing the original vision for Bitcoin.  They both also want decentralization, but I think they define it differently, or worry about centralization in different ways.

Those who favor small blocks, where Bitcoin is a settlement layer, fear the centralization of Bitcoin miners they expect if blocks grow.  To them, the best way to avoid central control is to have as many people as possible running the software.

Those who favor large blocks, where Bitcoin is not only a store of value but also the global medium of exchange, fear the centralization of off-chain layers which often require trusted third parties and may be easier for governments to control and shut down.  They also fear lower adoption rates if Bitcoin is only useful by large institutions for massive settlements.  To them, the best way to avoid central control is to have as many people as possible using the currency.

I’m not a tech guy, and I’m sure I’ve used incorrect verbiage and possibly badly mischaracterized the tech.  I tried to be honest and charitable about the two approaches, and I think I get the basic economics underlying both.  I wrote this as much to sort through my own thoughts and come to grips with my own understanding as anything else.

Will Coding Die?

I had to have a dramatic title if I’m going to muse about a dramatically titled piece in The Atlantic!

The Coming Software Apocolypse

It’s a long but interesting article if you like discussions on software, or if like me you love the series Breaking Smart.

A few scattered thoughts as I read it:

  • I’ve always thought it was dumb and barbaric how coding is done, without any WYSIWYG or visual editors to speak of, and often wondered how long until coding is a useless skill when better platforms for building software in a more tactile way come along (Mario Maker is the highest form of software construction!).
  • Reminder of why open source code is so awesome, and many of the problems referenced in the article seem to be solvable without overhauling coding if it more of it was just made open source.
  • It made me laugh at how easy it is for humans to overblow and focus on the big scary problems presented by new tech while overlooking the far greater life-saving benefits on the other side of the ledger.
  • Condescension and hand-waving about the best programming minds focusing on commercial solutions to “everyday problems” instead of “more important” research made me laugh too.  Quality of life improvements come in many forms and ripple in unexpected directions, and who’s to say Uber benefits society less than a new tool for cancer research?
  • Several people with great criticisms of status quo a little too eager to try to pick one new Grand Vision instead of just offering many in the market.
  • Made me ponder the psychology and emotional health of coders.  The intense reactions to proposed changes in the way the work is done seem overboard.  I wonder if the fact that many programmers were nerds or outcasts in the education system has created emotional baggage, or the fact that they are now respected and in control makes them very reticent about anything that would reduce the importance of coding.  Hackers are the new royalty in society, but it’s a strange combo because most grew up as outcasts and then became the cool ones, so they have an odd insider/outsider combo (Peter Thiel talks about this).

Are we entering a future where code is not the dominant interface between designer and design?

129 – Everyday Accounting for Life and Business with Levi Morehouse

On this episode, I’m joined by my brother Levi Morehouse, the CEO of Ceterus. Levi is fantastic at cutting down to the crucial aspects of accounting and in this episode, we dive into the most important numbers and accounting concepts you need to know as an entrepreneur, freelancer, or small business owner.

One of the resources Levi recommends for new entrepreneurs is Quickbooks. Because he feels passionately about small business entrepreneurship, Levi is offering to help entrepreneurs set up their QuickBooks Online accounts – free of charge. Click here to request for a member of Ceterus’ team to walk you through setting up your account.

In this episode:

  • Update on Ceterus’ growth
  • Accounting for non-numbers people
  • How to track personal finances
  • Holistically looking at expenses
  • Basic accounting for small business
  • The most important numbers for any business
  • Accounting basics for new freelancers and self-employed

Listen to previous episodes with Levi:

If you are a fan of the show, make sure to leave a review on iTunes.

All episodes of the Isaac Morehouse Podcast are available on SoundCloudiTunes, Google Play, and Stitcher.

Book in Brief: ‘Digital Gold’

I just finished Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money by Nathaniel Popper.

I’ve been fascinated with Bitcoin since I first heard about it during a discussion group at a conference in 2010.  Only recently have I begun digging deeper into the tech side (as much as my non-tech brain allows) and some of the stories and personalities behind it.

Digital Gold is not primarily about the tech or ideology or economics of Bitcoin, but the stories of the earliest enthusiasts.

The Good

The book introduces at least a few dozen individuals in the early Bitcoin scene, from the earliest programmers to more recent big-name investors.  It also provides a timeline of events along with Bitcoin’s price history, and makes the eight years of Bitcoin feel like a grand century-long epoch.  It’s a relatively easy, quick read with pretty decent layman’s descriptions of some of the tech behind cryptocurrency.

The Bad

There are several elementary attempts at subtle “gotcha’s” baked into the book, which reveal a sort of childlike worldview about the nature of order and the value of violence-backed authority.  The author laughably implies that the libertarian Silk Road founder Ross Ulbricht was only able to build the site only thanks to his education at the government subsidized University of Texas.  He also implies that there is some kind of hypocrisy in Bitcoin investor Roger Ver choosing to live in Japan, since Ver is libertarian and Japanese culture is orderly and steeped in tradition.

Conflation of libertarianism with a desire for disorder, or the assumption that emergent norms and traditions are less orderly than what Mises called the “planned chaos” of government reveal a fairly low-level of sophistication when it comes to understanding how society works.  This worldview surfaced several times, with passing comments about the potential dangers of money without a single authority to regulate it (despite the obviousness of anarchy dominating the history of money, language, law, and culture), and a willingness to worry about criminal acts committed with cryptography, but less concern about far more massive and obvious evils built into the foundation of governments and carried out daily by regulators seeking to shut down Bitcoin business.

The story carries itself and the slight deference to authoritarian outlooks was only rarely bad enough to be distracting, but it definitely tainted the book at times with a condescending tone that would have been better avoided.

The Verdict

If you already know Bitcoin, probably not a lot of new stuff here.  If you are interested in understanding the currency itself, I’d start first with What’s the Big Deal About Bitcoin by Steve Patterson.  But if you’ve heard bits and pieces of the personal stories and want to get a timeline of the players in the history of crypto, it’s worth a read.  However, if you only have an hour, the Netflix documentary Banking on Bitcoin covers an abbreviated version of the same story arc and many of the same people.

Games Worth Playing

Everything is a series of overlapping games.  Most emerged long ago and continue to evolve organically.  Some were invented by one or more persons.  Others are self-created and only experienced by you.

Most games are not worth playing.  Most are not worth rebelling against either.  Most games are best ignored while you create your own alternate game instead.

Occasionally it’s worth playing a game you didn’t invent (usually the emergent kind, almost never the games invented by others).  When you do, it’s best to know you’re choosing to and not pretend to be a victim of the game.

Occasionally it’s worth open rebellion against a game.  When you do, it’s best to know you’re choosing to and not pretend to be a martyr.

It’s always worth creating and playing your own games, regardless of what you do about the web of other games intersecting your life.  It’ always worth identifying the meta-game unique to you; your own search for meaning.

How to Prepare for Nothing?

Almost every career and education question on Quora is something like this:

“Should I do X?”

Where X is get a mentor, or study business, or go to grad school, or raise money, or research this industry, etc.

Rarely is there a specific goal.  The questions are asked as if someone can tell you whether X is “good” or “bad” in the abstract.  Occasionally there is a goal, like “Should I study business if I want to open a restaurant?” but even here, the mere asking of the question reveals that there is no clear connection between the end desired and the thing being considered.  If you don’t even know whether X will help you get there, or you don’t even know where “there” is, why are you even asking?

This is how people treat college.  Hardly anyone knows why they are there.  They will weakly tell you it’s to buy the signal that will help them get “a job”, but in the real world “a job” doesn’t exist.  Specific jobs do.  Most don’t know what kind of work they want, and almost none have ever bothered to check whether or not a degree is a requirement or the best route to get it.  It almost never is!

Most people aren’t looking for the best way to get from A to B, or even from A to discovering what B might be for them.  Most people are looking to be given queues on what other people will think is normal.

Seeking normal is a mind killer.