On occasion a simple sentence in a longer analysis captures not only the core issue being discussed but provides a solid framework for thinking about finance in general. Such was the case in an essay from Paul Krugman in the 20 May 2021 New York Times. In a very clear and insightful discussion on bitcoin, Krugman asked a very simple question: “What problem does this technology solve?” He expanded on that simple question as follows: “What does it do that other, much cheaper and easier-to-use technologies can’t do just as well or better?” Refining his initial question to: What problem does this financial product solve? pivots his analysis to be a very valuable framework for looking at finance and banking. Focusin on meeting real needs rather than invented needs use to generate profits to pay bonuses would certainly push finance and banking in a healthy direction.
The importance of Krugman’s analysis was reinforced in today’s Financial Times in an article on bitcoin. That article was focused on the value of bitcoin but not once raised the issue of why is bitcoin relevant or what problem does it solve. Perhaps it is time for the financial press to use the common sense of Krugman as they write about financial innovation.
