Who am I to correct Paul Krugman? But his piece on bitcoins is is a bit sloppy, it seems to me.
On the one hand he uses the Facebook twins to say that "bitbugs" believe in bitcoins because they're divorced from any social compact. This is just their silly talk and doesn't mean anything necessarily about bitcoins. Then he says that bitcoins are only valuable BECAUSE they are part of social compact, i.e. that people believe that they can be exchanged for goods. But he suggests this isn't sufficient, and that's what's good about "real" currencies, that they are backed by more than this--gold, which can be used for other things, or the backing of a government. THEN he says that of course gold and silver coins in years past were really just a representation of people's beliefs that they could be exchanged for real goods. If so, why aren't bitcoins just the equivalent and therefore at least as good as past methods of representing trading value?
I'm distinctly neither a bitbug nor a goldbug. I believe that currencies are fundamentally a social compact, and this notion that we can somehow make them neutral or mathematical is just silly. But, I also believe that bitcoins represent a fascinating experiment in crowdsourcing that social compact, rather than making such a social company overly-reliant upon a government or Federal Reserve which is in fact only made up of the assessments and actions of a highly select number of people.
Rebuttal to Krugman from Bitcoin Magazine: LINK.