In praise of Libra, part 3

This is our third and last post (for now) regarding Facebook’s new proposed crypto-currency, called Libra. We have already replied to various criticisms of Facebook’s proposed currency in our previous two posts. Here, however, I will switch gears and make an affirmative case in favor of Libra. My pro-Libra economic argument boils down to just two words: transaction costs. Simply put, if, as Facebook promises, making a payment or transferring funds with Libra will be as easy as sending a text message–if, in short, Libra will reduce “transaction costs” or friction in the current economic system–, how could one not support Libra? There are two main reasons, in turn, why lowering transaction costs is a massive slam dunk, to borrow a basketball metaphor.

First and foremost, as the late great Ronald Coase would often remind us, transactions costs matter. Many otherwise mutually-beneficial or value-creating activities go unperformed when transaction costs are too high relative to the value of the underlying good or service that would have been traded or exchanged in the absence of transaction costs. Secondly, even when transaction costs are low relative to the value of the underlying good or service to be traded, zero transactions costs are to be preferred to low transactions costs (with one caveat), just as low transactions costs are to be preferred over high transaction costs. So, what’s the caveat? The caveat is that the up front costs of eliminating or lowering transactions costs must themselves be worth the resulting benefits. On this score, I am still agnostic with respect to Libra, since this currency doesn’t exist yet, but if Facebook is willing to assume these up front costs by setting up an easy payment/money transfer system for its users, we should all be cheering Facebook on and hoping that it succeeds. This is a no-brainer, right?

Image result for slam dunk

Artist credit: Dan Sproul

About F. E. Guerra-Pujol

When I’m not blogging, I am a business law professor at the University of Central Florida.
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