Bitcoin had been in the news recently, having breached the £100k mark. This got me thinking on perceived value and human behaviour, so I did a little research.
The intersection of human behaviour, economics, and emerging financial tools like Bitcoin offers fascinating insights into how perceptions of value and potential gain shape decisions. Bitcoin, often referred to as "digital gold," highlights this dynamic vividly. Its rising value creates a paradox: as its price increases, people are less inclined to spend it. This reluctance stems from the belief that Bitcoin’s future value will surpass its current worth.
For example, buying a car with Bitcoin valued at £100k might seem sensible at the time, but if Bitcoin’s value doubles soon after, the buyer may regret their decision, feeling they effectively paid £200k in fiat terms. Sellers, too, face volatility risks, as the value of the Bitcoin they receive could plummet before they convert it to fiat. This dynamic, coupled with Bitcoin's deflationary nature due to its finite supply, incentivises hoarding over spending, limiting its practicality as a currency.
This reluctance to spend during periods of rising value mirrors broader human behaviours, particularly in tax policy. Many people, even those who are not wealthy, support policies that favour the wealthy due to aspirational thinking. This mindset, often called the "lottery mentality," reflects the belief that they might one day become wealthy themselves. As a result, they perceive policies protecting wealth as safeguarding their potential future fortunes. Identification with success also plays a role, as wealth is often equated with hard work and achievement. Supporting lower taxes for the wealthy aligns individuals with values like ambition and merit, even if they do not directly benefit from these policies.
Another contributing factor is the fear that taxing the wealthy could harm economic growth. This belief, rooted in the theory of trickle-down economics, suggests that lower taxes on the wealthy encourage investment, job creation, and innovation. While there is some truth to this argument - wealthy individuals do have significant investment potential - real-world evidence often contradicts the idea that such policies benefit the broader economy. In practice, much of the wealth saved through tax cuts is not reinvested in ways that stimulate growth. Instead, it is often directed into offshore accounts, stock buybacks, or luxury goods. Furthermore, concentrating wealth among the rich reduces overall consumer spending, weakening demand and slowing economic growth.
Empirical evidence from various tax regimes underscores these points. Tax cuts for the wealthy during the Reagan and Bush administrations in the United States, for example, led to increased deficits and modest economic growth, falling short of the promised economic booms. The "Kansas Experiment" in 2012, where the state implemented dramatic tax cuts for high-income earners, resulted in budget crises and stagnant growth, forcing a reversal of the policy. In contrast, countries like Sweden and Denmark, with high taxes on the wealthy, enjoy strong economies and high standards of living. These nations demonstrate that progressive taxation, when paired with reinvestment in public goods like education and infrastructure, fosters both equality and growth.
The parallels between Bitcoin usage and tax policy extend to a shared human tendency to prioritise future gains over immediate utility. Bitcoin holders often refrain from spending during price surges, much as aspirational voters support policies favouring the wealthy in the hope of future personal benefit. Both behaviours are driven by the desire to avoid perceived losses, whether financial or aspirational. Addressing these issues requires systemic solutions. For Bitcoin, enhancing its transactional utility through tools like the Lightning Network and promoting the use of stablecoins for everyday purchases could mitigate its volatility. For tax policy, emphasising evidence that progressive taxation supports economic growth and ensuring transparent reinvestment of tax revenues in public goods can help counter the belief that taxing the wealthy is harmful.
These interconnected issues highlight the complex relationship between individual aspirations and collective well-being. While the pursuit of personal gain drives innovation and ambition, it can also perpetuate inequality and hinder economic stability. Understanding these dynamics is essential for building systems - both digital and economic - that balance individual interests with the needs of society as a whole.
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