Can Bitcoin Become Money?
A familiar question that Frank Shostak recently raised, so at Liberty Chat I gave my usual answer:
The reason Mises needed to supplement his theoretical explanation of the purchasing power of money with his historical “regression theorem” was simply to protect the explanation from charges of infinite regress. In other words, since Mises was explaining today’s purchasing power of money (ultimately) by reference to its purchasing power yesterday, Mises needed to come up with a way to stop the explanation at some finite point in the past. He did this by saying at some point, the monies gold and silver (or other commodity monies) were mere commodities in a system of barter. Economists already knew how to explain relative prices in a barter world, so Mises could stop, having completely explained the purchasing power of money in a logically coherent way.
We can give a similar explanation for Bitcoin. We can trace back its purchasing power until the point at which Bitcoin was invented. Certain people really did sell pizzas and other goods against bitcoins in the first transactions. Why did they do so? I don’t know; ask them. But the point is, they did do so. That gave everybody an objective frame of reference for the market value of bitcoins, which then snowballed to the present day.
In closing, let me be clear that I am not necessarily predicting that Bitcoin will one day be used by billions of people as a primary money. Rather, I am merely arguing that the argument against Bitcoin citing Misesian monetary theory—such as Shostak recently used—doesn’t work.
Certain people really did sell pizzas and other goods against bitcoins in the first transactions. Why did they do so? I don’t know; ask them.
It matters why, because otherwise you have an infinite regression of “because this other guy used it as money”.
And if you don’t need to have a reason why something becomes money, then you don’t need a Regression Theorem.
Again, if it doesn’t matter why something is considered money, then please accept this handful of dirt for all of your possessions, simply because you choose to believe that it is worth that much.
And, no: Since bitcoins have no use-value, they can never be money in the sense of facilitating the subjective value-comparisons between the goods* that are sold for money and the goods that are bought with the money – which is the whole point of trade (to acquire goods that are subjectively more valuable than those which are offered for sale).
*Goods or services.
It matters why, because otherwise you have an infinite regression of “because this other guy used it as money”.
I think Bob is simply saying that despite not knowing exactly why, it is evident that there is in fact an answer to why. You’d have to actually ask the people involved at the time though, and even then they might not be able to express their preferences. But people did in fact act in such a manner. Not knowing exactly why people valued bitcoins for certain exchange ratios, despite its historical lack of purchasing power (since it didn’t even exist before 2009), does not mean you therefore have an infinite regression after all though. Why would that be the case?
An infinite regression is only supposedly implied by explaining purchasing power of a medium of exchange in reference to its past purchasing power. It’s not infinite, however, if we can stop at some point by explaining the early trades in terms of relative barter prices, which we can already understand with basic catallactics. The relative barter explanation must be the case for Bitcoin at some point too, despite not being privy to the exact subjective valuations in the minds of those who were there. Bitcoin had no purchasing power in 2008, since it didn’t even exist. So to say you don’t know exactly why people did in fact value it doesn’t mean you therefore have an infinite regression after all. That makes no sense.
Bob is not saying that the first Bitcoiners valued it ‘because this other guy used it as money’ first, and so on. If that were true it would suffer from an infinite regression problem. He’s saying that is explicitly NOT in fact the case and can only be that way, despite not knowing exactly what the early subjective valuations were based on. You could speculate as to what it was based on, but there is in fact no need to explain it to anybody’s satisfaction since after all it’s subjective. An economist should not be dissatisfied with the explanation for why people pay for tattoos by saying that he cannot personally understand why anybody would want a tattoo. It is not his personal subjective valuations that matter in the explanation. It seems to be the height of hubris for someone so invested in subjective value theory to tell others they have no objective basis to value something.
I will speculate though: maybe the early Bitcoin adopters just thought Bitcoin was kind of cool and so they wanted some, and they got a benefit out of making trades just based on the fact that it’s kind of fun to make trades with this cool new thing. They can buy a pizza with dollars, but buying it with bitcoins means you get the pizza + the benefit of the enjoyment of making a fun trade with Bitcoin.
The fact that others did not have an infinite amount of their own bitcoins to trade with (since Bitcoin is limited), and they wanted to save some for themselves instead of trading it all away, means there was some exchange ratios they would have happy with (within some upper and lower bounds). For example, if I had 5000 bitcoins I might have been happy to sell, say, 10-1000 of them for a pizza, but not all 5000 because I still want to keep some to play around with afterwards. That’s where the initial exchange ratios in barter trades might lie, within some boundaries (not exact quantum amounts down to the 8th decimal place), but those boundaries were still enough to get the ball rolling.
Just to clarify further on what I was saying at the bottom of my post. Whenever I say that perhaps the early Bitcoiners just traded their bitcoins because it was cool and fun to trade them, and there was geek-cred to be had in it, people always reply: “Oh yeah? Well why trade specifically 10,000 bitcoins for a pizza? Why not 5000, or 2000, or 1? Or a million?” The idea is to show that, due to the non-utility of a bitcoin, a ‘rational exchange ratio’ can’t be decided upon. It’s arbitrary and so it doesn’t explain the specific prices we saw, and so it doesn’t explain the specific prices we see today either through regression.
‘Rational’ apparently means an exact value down to the smallest possible unit, not an arbitrary one. My point is that while the exact amount agreed upon may have been arbitrarily decided within certain boundaries, the bounded region itself is not arbitrary. People didn’t have infinite amounts of bitcoin, so they couldn’t trade a million even if they wanted to. They also probably wanted to keep a significant number of bitcoins left over, so they didn’t want to trade them all away. Why 10,000 and not 5000? Maybe there is no non-arbitrary reason. The two parties just picked one vs the other and agreed to it. But why 10,000 instead of a 50,000? Well, maybe because he only had 50,000 in total, and so he would only be willing to traded at most 20,000 away, in order to keep a stash for future fun trading or testing.
So I don’t think exact amounts down to smallest unit are necessary to explain, only that non-arbitrary bounded regions exist within which people would be happy to make the trades. In a more competitive market with more price discovery and historical reference, those boundaries shrink to insignificance. If you can get a better price elsewhere with little fuss you typically will. But even now, they boundaries are still there to some degree. Why buy 1.351 bitcoin for $432.56 instead of 1.351001 bitcoin for $431.54999? Well, no real reason. Both parties in the trade might be happy with either because they’re practically the same thing. So why did they decide on 1.351 bitcoin for $432.56? So it’s arbitrary there too, but only within a very small boundary. But the bounded region is not arbitrary, and I think surely that’s all that matters to say that exchange ratios form. The fact that the boundaries might sound like large numbers in early bitcoin days simply doesn’t matter when individual bitcoins were practically disposable worthless things. The large sounding numbers simply causes the listener to perceive it differently.
My point is that while the exact amount agreed upon may have been arbitrarily decided within certain boundaries, the bounded region itself is not arbitrary. People didn’t have infinite amounts of bitcoin, so they couldn’t trade a million even if they wanted to.
As far as trades made with bitcoins, the bounded region isn’t arbitrary, since there will only ever be so many of them.
But that limit was, in fact, arbitrarily decided. Why 21 million and not 100 million?
The number of grains of sand may or may not be sufficiently large to satisfy people’s perceived need for “enough money”, AND the government just isn’t going to bother confiscating it, so why not just use grains of sand as money?
If there’s no connection to use-value, then money doesn’t need to be scarce, since it’s value is arbitrarily assigned, anyway.
It seems to be the height of hubris for someone so invested in subjective value theory to tell others they have no objective basis to value something.
So there should be no logical reason why you would reject this handful of dirt in exchange for all of your possessions.
Just simply accept it in payment and it will be worth whatever you sold merely because you chose to believe it so.
Who is anyone to tell you that you had no objective basis to value your possessions at a handful of dirt?
My point is that there’s a difference between subjective value and arbitrary value.
So there should be no logical reason why you would reject this handful of dirt in exchange for all of your possessions.
Just simply accept it in payment and it will be worth whatever you sold merely because you chose to believe it so.
Who is anyone to tell you that you had no objective basis to value your possessions at a handful of dirt?
But I judge for myself that dirt has no purchasing power, so I don’t want to accept it as payment as a medium of exchange, and I can’t do anything else with it personally.
I’m saying that Bitcoin in the early days wasn’t useless in some objective way. People may have judged that it had no purchasing power as a medium of exchange at the time, but they wanted them for other reasons. You could actually enjoy the sending of the bitcoin to others, and receiving them. It sounds silly but is joy in just seeing that the tech works as it is supposed to. I know I felt that when I received my first bitcoin. Who is anybody to say it can’t be true?
Also you might have wanted them if you simply judged that in the future they may have purchasing power, even if they don’t in the past. So it’s not a regression link as a medium of exchange, but it’s a barter price based on expected future value. That’s kind of a self fulfilling prophecy so it sounds a little problematic, but if you think it through I don’t see any reason why it is in fact problematic. It just sounds like it.
http://webcache.googleusercontent.com/search?q=cache:iC5jDAcJ41sJ:https://bitcointalk.org/index.php%3Ftopic%3D196000.0+&cd=9&hl=en&ct=clnk&gl=uk
Even today, bitcoins on the testnet have a price and they are not fungible with bitcoins on the main network. Developers need bitcoins on the testnet with which to test their implementations. The early developers and coding enthusiasts involved with Bitcoin may have feasibly traded bitcoins amongst each other just so that they could test their own bitcoin software. By itself that might have caused small prices. Not all devs would have wanted to mine their own, but they could offer to buy them off miners for small prices.
Also handfuls of dirt may make a bad money for lots of reasons, even if it had a high use-value. Anybody can grab their own handful of dirt since it’s everywhere, and not handfuls will be fungible with every other handful. Some may have more clay in it, for example. So just because I don’t accept a handful of dirt as payment but I do bitcoin, doesn’t mean there is some contradiction in my thinking, I think. It’s undeniable that bitcoin has purchasing power but a handful of dirt doesn’t. And that’s what you have to stuggle with. Why does bitcoin have a price at all if your theories are true? If everybody *should* have judged bitcoin like they would have judged handfuls of dirt (according to you), then why didn’t they?
Just want to follow up on what I said about the testnet bitcoins. My point is that, as you can see from the thread I linked to, even today people buy and sell testnet bitcoins at mutually agreeable prices. The testnet tends to get reset when this gets out of hand (it has been reset twice), but the fact that it happens at all shows my point.
They don’t buy them because they want to use them as a medium of exchange. Bitcoin itself is better for that since it doesn’t get reset on a whim. They literally buy them because they are writing bitcoin implementations themselves, maybe even just for fun, and they want to test sending transactions. So this is a non-monetary use-value, subjectively determined by them.
In the early days of Bitcoin, before there was a Bitcoin testnet, perhaps the same kind of thing occurred. I’m not saying this is definitely what bootstrapped Bitcoin. I’m just saying there are plenty of theoretical reasons why people would have a use-value for a bitcoin. I don’t know for sure, but we don’t have to throw the regression theorem out of the window just because Bitcoin exists, or conclude that Bitcoin will inevitably fail due to the rock-solid theorem. Which I don’t think makes sense anyway, because the theorem would say that it shouldn’t even become a medium of exchange at all, not that it will exist and then somewhere down the line dramatically fail when people suddenly ‘wake up and realise bitcoins are useless’.
It’s possible both Bitcoin and the theorem are just fine.
Bitcoin had no purchasing power in 2008, since it didn’t even exist. So to say you don’t know exactly why people did in fact value it doesn’t mean you therefore have an infinite regression after all. That makes no sense.
I saw this day coming …
Yes, you’re technically right.
But at the point of arranging patterns into bitcoins (bitcoin creation), someone said to themselves “People will use this as money” – thus completing the circle.
For what it’s worth, Jack here is representing my position very well in his discussion with “guest.”
I disagree. Isn’t that the whole point of Austrian economics? People have preferences and different people have different preferences and because of that we get an advantage out of trade.
Out of a world population in the billions, some tiny percentage of people decided they wanted to use a crypto currency to buy a pizza.
I happen to choose otherwise.
Not true at all, Bitcoin merely facilitates the exchange. The value comparison could be based on anything you like: Federal Reserve Notes, Gold bars, hours of labour, personal coolness factor, the bitcoins just don’t care about your subjective valuations.
I happen to choose otherwise.
But if you’re going to choose bitcoins as a money, even though it has no use-value, then all I should have to do is make copies of them and give the floppies to you (bitcoins have made floppy disks useful again, in my scenario).
If you respond by saying that you can’t use the copies on the Bitcoin service, then you’re revealing that it’s actually the computers you value for the services they can provide, rather than the bitcoins, themselves.
Not true at all, Bitcoin merely facilitates the exchange. The value comparison could be based on anything you like: Federal Reserve Notes …
Then it’s the FRN’s that are claimed to have the value, not the bitcoins. (Of course, FRN’s aren’t money, either, but the logic would apply to gold bars, hours of labor, etc.)
“It matters why, because otherwise you have an infinite regression of ‘because this other guy used it as money’.
And if you don’t need to have a reason why something becomes money, then you don’t need a Regression Theorem.”
Writings such as these totally confuse the point of the regression theorem. It is not the job of Austrian economics to ascribe motives/reasons for preferences, as you are implicitly claiming it needs to. The regression theorem does not address “why something becomes money”. Rather it answers the question of HOW it becomes medium of exchange.
Asking “why would someone sell pizzas for bitcoins?” is not an economic question, but a psychological one.
Initially a small group of computer geeks would have likely shared a sense of community and had respect for the efforts put into creation of the idea as well as subsequent mining/verification. My speculation is that that played a role in its value. I think the geek/grass roots aspect of bitcoin adds a sense of community to bitcoin for many users.
They are valuing the computers and the humans for their ability to provide verification services.
The computers and humans have value, not the bitcoins.
Is there any historical explanation of the origins of media of exchange that would be excluded by the regression theorem?
The regression theorem excludes the idea that government force is necessary for the creation of money.
Another one, which might actually be the same thing as the above, is the idea that money is a social contract; that if someone holds money, others are obligated to accept it in trade (and therefore a government needs to be the one who creates money, the argument goes):
Money Is A Social Contract
Okay, so it excludes the idea that those types of explanations (where money emerges without government force) are excluded. But does it itself exclude any scenarios?
I think I understand what you’re getting at.
As far as scenarios, it would exclude all things (or non-things, in the case of bitcoins) which don’t have a use-value.
(Aside: According to quotes referenced by Smiling Dave in the course of his treatment on bitcoins, Mises did believe that money was merely a generally accepted medium of exchange. Rothbard held this view, as well [I can get the link if you like].)
So if I had invented bitcoin, mentioned it to some friends and we all think ‘Hey, this thing could take off and when it does bitcoins will be worth thousands of dollars’ and my friends buy some bitcoins from me on the basis of that belief alone. No ideological or idealistic reasons, no interest in bitcoin as a curiosum or something like that. There is no prior price of bitcoins and my friends bid only on the basis of how likely they think it is that bitcoin will take off and how high the price could go in that case.
In this scenario, did bitcoin have a use value before my friends and I agreed on a price for them? if so, what would *not* count as having a use value? if not, then would the regression theorem exclude the possibility that in this scenario bitcoin becomes a medium of exchange?
(to be sure, i think the regression theorem is either false or meaningless, and I now have trouble understanding how for such a long time I actually believed it was meaningful and true)
Koen wrote:
(to be sure, i think the regression theorem is either false or meaningless, and I now have trouble understanding how for such a long time I actually believed it was meaningful and true)
Whoa let’s not throw the baby out with the bathwater. It’s still important to have the regression theorem for applying subjective value theory to money. But yes the way I used to think about it was not quite right, in retrospect.
even if we were to accept that the purchasing power that money has today is explained by reference to the purchasing power it had yesterday (by way of the empirical claim that people form expectations about tomorrow’s purchasing power of a medium of exchange on the basis of yesterday’s purchasing power of said medium of exchange), does that imply that a good had to have use value before it started being used as a medium of exchange?
What if the purchasing power of the good was 0? if you could buy no other goods with it whatsoever? That’s still a number, a price of 0.
And what happens when a good starts to be used as a medium of exchange is that it will start being traded at a bit of a premium over its old price (regardless of whether that price was $4 or $0 or 3 apples or whatever) because it now has a new (additional or first) value or role, namely as a medium of exchange.
So if people want to estimate a good;s future purchasing power when a good starts being used as a medium of exchange what they have to estimate is how much this premium will be. And for this it doesn’t seem to matter whether yesterday’s price was 0 or >0.
It’s still important to have the regression theorem for applying subjective value theory to money.
Before the Regression Theorem was explained, opponents of the Austrian School were right to demand an explanation that was more than “Because it had such and such a price, yesterday”.
The opponents back then were, unlike the bitcoin adherents today, not content with “Well, it had a price, yesterday, so there’s no need to explain money prices in further detail”.
There’s no need to have a Regression Theorem, if all you have to do is say that it was traded at such and such a price, yesterday.
No, guest, you’re misunderstanding me. You said that Shostak agreed that if gold ceased to be useful as a consumption or production good, then it could still serve as money. So that’s what I meant when saying people can use a money and have a basis for identifying its purchasing power, so long as they saw what it was the day before (whether or not it had consumption/production uses yesterday).
The reason Mises needed the regression theorem was to make the explanation stop at a finite point. If I explain today’s PP of Bitcoin by reference to yesterday’s, I am not open to infinite regress. We stop back at the first transaction. I don’t know exactly what motivated those people to accept it as a medium of exchange, but we know they did.
If I explain today’s PP of Bitcoin by reference to yesterday’s, I am not open to infinite regress. We stop back at the first transaction.
Why do you need to stop back at the first transaction when you can simply stop at the second-to-last transaction?
Why wouldn’t that be sufficient, given that bitcoins are arbitrarily valued?
From Shostak’s article:
Once a thing becomes accepted as the medium of exchange, it will continue to be accepted even if its non-monetary usefulness disappears. The reason for this acceptance is that people now possess previous information about its purchasing power.
This is where I disagree with Shostak.
He thinks that something can still be money if it’s non-monetary usefulness disappears.
But if something can, at any point, be money without having a use-value, then it doesn’t need to have ever had one, since, in Shostak’s view (apparently, only in this particular instance; a minor lapse), “money” is simply a commonly accepted medium of exchange.
(There’s no logical reason, given Shostak’s view, why he shouldn’t be accepting Bob Murphy’s argument. He’s definitely susceptible to abandoning the insistence on the Regression Theorem.)
Well, if all that was required of a money was that it was commonly accepted, then nobody should have any problem accepting literally anything as money, and without regard for its degree of scarcity and/or use-value.
Why does a money need to be scarce if its exchange-value is arbitrarily assigned, anyway. Keep in mind that “arbitrarily assigned” is not the same as “subjectively valued”, since, in the latter case, the subjective value comes from its use-value, whereas in the former case, the value may as well have been picked, at random, out of a hat.
guest wrote:
(There’s no logical reason, given Shostak’s view, why he shouldn’t be accepting Bob Murphy’s argument. He’s definitely susceptible to abandoning the insistence on the Regression Theorem.)
I’m glad you are admitting this, guest. To be honest, *this* is why I’m so surprised at how many Austro-libertarians are criticizing Bitcoin in this fashion. There are “big gun” Austrians (I think Rothbard for example) who wrote that if, one day, gold stopped being used for all consumption and industrial purposes, it could nonetheless continue to function as money, because people would still have the memory of its purchasing power from the day before.
So, as long as Bitcoin has purchasing power today, that should be good enough to let people use it as money tomorrow. It doesn’t matter that today it has no use in production or consumption.
So, as long as Bitcoin has purchasing power today, that should be good enough to let people use it as money tomorrow.
But here’s the trap we fall into if we’re not going to hold that money has to be something that currently has a use-value:
Anything can become money if you stick a gun in someone’s face; You can have a coerced medium of exchange, and it will still be considered “legitimate money”. No need to poo-poo the Federal Reserve for artificially inflating the money supply.
As Ron Paul said in his debate with Charles Partee, “Paper can’t be money.”
To clarify, I am not special-pleading for morality, here, since the function of a medium of exchange is to permit individuals to compare the subjective value of the goods they sell with the subjective value of the goods they buy. All trade has that goal in mind (since all trades at least involve the pursuit of psychic profit).
So, as soon as the ability for individuals to compare the subjective values of goods goes, so too goes a medium of exchange’s designation as “money”.
And since individuals can only compare the subjective values of goods, when engaging in indirect exchange, if the medium of exchange, itself, has a use-value; then that means that all money must have a use-value.
Either we have to hold that money must have use-value, or we must admit that Austrian Monetary Theory is a case of special pleading for a kind of “moral money”.
I think Lord Keynes would have a field day with us if we failed to defend the former.
Lord Keynes, fight with me, buddy.
😛
Do it for Keynes.
Anything can become money if you stick a gun in someone’s face …
(To belabor this point:)
Ergo, the statist would be correct to say that government force used to decree that “such and such will be the money” would be beneficial to everyone, since money enables a Double-Coincidence of Wants; since a money can be used to buy an ever greater array of goods, services, and capital the more people that use it; and since the fastest way to make a medium of exchange to become generally accepted is through coercion.
The fastest way to make a money to be generally accepted being coercion, it would follow logically that the fastest way to the prosperity that derives from having a medium of exchange would be for someone to force a money on us.
You like money, don’t you? Well, in order to make an omelette, you have to break some eggs.
But since the FUNCTION of a medium of exchange is to facilitate an individual’s SUBJECTIVE valuations of goods sold and bought for money, legitimate money can neither be coerced (because it wouldn’t be subjectively valued) nor arbitrarily valued (since there would be no value-relationship to the goods sold and bought with it with which to make comparisons – value-relationships which must be established by the seller of Good #1, of Money #1, and of Good #2).
Subjectively valued: Yes; Arbitrarily valued: No.
There are FOUR lights, damn it!
guest do you consider FRNs to be money right now?
No. They are IOU Nothings.
They used to be IOUs *for* money.
They used to be IOUs *for* money.
IOU “money in the narrower sense” (what Mises called money substitutes) can also be “money in the broader sense” if the IOUs are transferrable and come to be a widely accepted medium of exchange. After all, anything that is a commonly accepted medium of exchange is by definition money. Whether that something is a transferrable IOU for narrower money isn’t relevant.
That’s why we use measures like M2, because you can have money substitutes in excess of the reserved narrow money that they’re supposed to be substituting (what Mises called fiduciary media), with fractional reserve banking. But the fiduciary media is still considered fungible with the narrow money because it is so freely convertible on demand, so we count them as making up the same abstract money stock (rather than count them separately as two competing monies), since that’s how it tends to function.
“Anything can become money if you stick a gun in someone’s face”
This is not really true is it? At least for en effective money. An effective money needs to have certain properties. It must be durable, limited, difficult to duplicate etc. If we were to try to use soil or sand, I can explain why these would not be effective because of these properties – nothing to do with use value. It seems an effective argument as to why these things are not used as money.
However, soil and sand DO have a use value. I can buy sand from my builders merchant and soil from my local garden center. So this cannot be a why they are not used as money.
From Bob Murphy’s article:
So does this prove that Bitcoin can never become a generally accepted medium of exchange, i.e. a genuine money?
When Austrians say that printing money in excess of specie causes malinvestments, it’s because the newly created money misrepresents the subjective value relationships between the goods that are sold for the money and the goods that are bought with the money.
There can be no such thing as malinvestments if the function of money isn’t to facilitate valuations between goods that are sold and bought; That is, if there is no link to use-value.
A malinvestment isn’t just a business mistake; It’s caused by fraud. Someone claims that the value of money is worth X, but because there is more money than X, prices in terms of the money have deviated from X.
That’s what causes the boom-bust cycle. It’s very important that Austrians get the bitcoins issue right.
The fact that FRNs are a generally accepted medium of exchange doesn’t change the fact that they cause the boom-bust cycle.
This is why it is necessary, but not sufficient, for a money to be generally accepted.
When Austrians say that printing money in excess of specie causes malinvestments, it’s because the newly created money misrepresents the subjective value relationships between the goods that are sold for the money and the goods that are bought with the money.
guest, reading through some of your comments I think you’re thinking in terms of ‘incorrect absolute amounts’ being the problem, rather than relative changes causing a problem.
Let me lay the groundwork with an example. Right now if somebody offered me 100,000 Japanese Yen for my desktop computer, I would have no idea if that was a good deal or not. I’m from England and not very well travelled, and so I honestly have no way to evaluate the purchasing power of a Yen out of thin air. For all I know, that offer is really good. If somebody offered me 5000 British pounds for my computer, I’d immediately accept the deal. I know that I could buy a much better computer with that amount of money. I can judge the purchasing power of the 5000 units immediately. For all I know, the same is true with 100,000 Yen. I might be able to buy a better computer with that and still have some left over. Or maybe it’s the exact opposite; I honestly don’t know.
I chose Yen for this example because I do know something about it. I know that they use large sounding numbers for relatively small amounts of purchasing power over here. I just don’t know the exchange ratio to within a few orders of magnitude. But if I didn’t even know what I do know, then 100,000 Yen would mean literally nothing to me whatsoever. It only sounds like a lot, but so does 100 trillion Zimbabwean dollars. It’s just a nominal thing.
The only realistic way for me to find out is to look up the exchange rate of yen for British pounds, to convert it into something that I am familiar with. When I do this, I see that 100,000 Japanese Yen is worth about £583. Now I immediately know that I would not accept the deal. The reason I can so immediately judge the purchasing power of a pound is because I shop with pounds every day. I have in my memory an array of exchanges ratios of real goods with pounds. That past array of prices is what I use to judge the purchasing power of the pound. I have no such memory of Yen with which to judge the purchasing power of a Yen, so I cannot do it without the conversion. That is the regression theorem in action. It’s not just some theoretical argument. As my example shows, humans do actually behave this way. Mises really was describing how humans do act.
If you want to say that money requires there be a non-monetary use-value permanently (and so that if the use-value went away, the good would necessarily lose its character as money), then I think what you’re describing is not how humans actually act at all. People say that fiat money does have a use-value because it’s a essentially a get out of jail free card. You’re forced to pay taxes with it. You can’t pay your taxes in eggs, milk, or gold; you have to use the legal tender. And since the people are forced to pay taxes, this good will therefore always have some demand. And this demand is not for its purchasing power, but just to pay off the Mafia. But using this knowledge, you can judge that it will have purchasing power as a medium of exchange also, since if you acquire it not directly for your own taxes you still can assume that others will want to buy it from you, for paying their taxes, somewhere down the line.
So fiat money does have a non-monetary use-value in that sense, and so we don’t need a historical link with gold to explain its purchasing power. That I suppose is true. But still, when used as money, fiat dollars are not judged in that way. Nobody judges the purchasing power of a dollar by thinking in terms of macroeconomic variables such as tax rates and GDP, weighed against M2, and such things. If that were true then I could easily evaluate the purchasing power of the yen by looking up relevant macroeconomic statistics about the Japanese economy, and use that to conclude how much the Yen will be in demand for taxes, versus its scarcity, etc. But that would be absurd. People literally just don’t act that way. We really do judge purchasing power today based on a familiarity and memory of past prices. We don’t care what others want it for, fundamentally. That’s too high level, in that it doesn’t describe how humans actually behave. It’s not in accordance with methodological individualism. We really only care that it is accepted at certain exchange ratios, which we predict will be true because of our induction into the future from our memory of the past. Which means that current use-value is not required for a money good to remain as money, even if we can agree that fiat money does have some non-money use-value. It’s just a red herring, that’s all. It’s there but it’s not a requirement. Arguably it’s only a requirement to get the thing bootstrapped into its character as a money good, but then it runs on its own steam since its purchasing power is what people then judge the use of it as.
I believe we can even see this with historical examples, like the pre-1991 Somali Shilling. It doesn’t make a particularly good money because it can be counterfeited relatively cheaply, and interestingly the counterfeits are regularly accepted and fungible even when they can tell the counterfeits apart. But it did survive, even though it has no use-value for taxes any more. It did not lose its character as money just because of that. People’s memory of yesterday’s prices remained after 1991, and things went on as normal for the money good in that sense.
http://jpkoning.blogspot.co.uk/2013/03/orphaned-currency-odd-case-of-somali.html
That is what enables us to do economic calculation. We can quickly evaluate heterogeneous goods in terms of money prices that we’re familiar with, and we can quickly judge how much purchasing power we will be rewarded with if our revenue exceeds our costs, and so on. So we can see that if the total amount of money changes, maybe because the government prints a bunch, for example, relative prices get thrown out of whack. This quickly sorts itself out again though, as prices adjust to reflect the change. Economic calculation gets diminished if prices change by too much too rapidly, such as during a hyperinflation.
When miners find new gold in a gold-based monetary society, the same is true, but there is a functional limit so it matters a lot less. The relative changes over time aren’t drastic, as they might be on the basis of political decisions when the government issues the money. It might very well be drastic, though, if somebody figures out a way to synthesise precious metals cheaply. That would cause hyperinflation of gold and silver money too, even though it would be market based and not arbitrarily decided by politicians. And I think this would clearly do much more damage to the economy than the extra benefit people would get from of being able to use the new cheap gold and silver in industry. This is paradoxical if you think a money good only brings its value to society at the end of line, when the money good is finally used for its non-monetary use-value. If that were true, then free infinite precious metals would be nothing but a good thing even in a society that uses precious metals as money. But I think it’s clear that if this were to occur, it would be very disastrous for such a society.
Anyway, my point is that after the new money is created (even if done arbitrarily by politicians), nothing further happens. It matters, of course, who gets to spend the new money first, but it sorts itself out and things will return to normal, only with some wealth syphoned off to the counterfeiters or gold miners or politicians. But it’s not as though it means there is some new permanent problem afoot, due to there now being an arbitrary new absolute amount of total money that is different from what the total money stock ‘should be’, and thus economic calculation is permanently ‘out of sync’ or something. I don’t know for sure if this is what you’re saying, reading your comments, but I think it’s what you’re getting at.
People say that fiat money does have a use-value because it’s a essentially a get out of jail free card. You’re forced to pay taxes with it.
…
And since the people are forced to pay taxes, this good will therefore always have some demand. And this demand is not for its purchasing power, but just to pay off the Mafia. But using this knowledge, you can judge that it will have purchasing power as a medium of exchange also, since if you acquire it not directly for your own taxes you still can assume that others will want to buy it from you, for paying their taxes, somewhere down the line.
So fiat money does have a non-monetary use-value in that sense, and so we don’t need a historical link with gold to explain its purchasing power.
Mr. Murphy, surely you recognize this as Mosler’s argument.
If you accept this, then you’ve backed away from your arguments against MMT.
Let me try to be clearer. When gold becomes money we don’t have to explain it by saying there must be some historical link, where it backed some other commodity. We recognize that it has non-monetary uses and so it may have been traded for its own sake in barter.
If we agree instead that fiat money has no non-monetary uses, and never did, then I think we do have to establish a link to explain it. But if we concede that fiat money does technically have a non-monetary use, in that it must be used to pay taxes, then technically it’s not necessary. What I mean is, it’s possible, I guess, that a fiat money could become established that has no prior link to anything, just based on taxation giving it a non-monetary use, meaning that relative barter prices can come form and then become adopted as a medium of exchange. It’s kind of an awkward explanation though.
To be clear, I’m not saying that I think this is the historical explanation of dollars, or of anything. I think this isn’t the case with dollars, and the historical link with gold is the right explanation. I’m just conceding what I think is a small point: that fiat may have a non-monetary use. But as I said, I think it’s just a red herring.
If we agree instead that fiat money has no non-monetary uses, and never did, then I think we do have to establish a link to explain it.
I want to correct myself here. It’s not right to say that it ‘never did’ if there was in fact a link. That link IS its past non-monetary use. So scratch that part.
If we agree instead that fiat money has no non-monetary uses, and never did, then I think we do have to establish a link to explain it. But if we concede that fiat money does technically have a non-monetary use, in that it must be used to pay taxes, then technically it’s not necessary.
…
I want to correct myself here. … That link IS its past non-monetary use.
Bob Murphy’s response:
You can imagine my surprise when Warren then gave his own analogy for MMT, in which people in the room won’t pay him anything for his business cards. But then he explains that there is a man with a gun outside the room, who won’t let them leave unless they have one of the cards. Voila! Now people are scrambling over themselves to perform jobs for Mosler. Unemployment is solved.
Welcome to my nightmare, Bob.
😀
Hey Mosler? I could really use an MMT-er right about now.
Lord Keynes, where the hell are you?
Anyway, my point is that after the new money is created (even if done arbitrarily by politicians), nothing further happens. It matters, of course, who gets to spend the new money first, but it sorts itself out and things will return to normal, only with some wealth syphoned off to the counterfeiters or gold miners or politicians.
That’s not true, and it’s not the Austrian position.
Austrian Business Cycle Theory says that money printed in excess of specie causes the boom-bust cycle.
Yes, there is an initial distortion, with first users benefitting at the expense of later users, as you say.
But there is also a necessary crash that will come because the newly printed money doesn’t represent anything. The printed money has misrepresented the value of the goods the paper is said to represent.
But there is also a necessary crash that will come because the newly printed money doesn’t represent anything. The printed money has misrepresented the value of the goods the paper is said to represent.
It’s not because ‘the newly printed money doesn’t represent anything’. The crash comes becomes capital intensive projects were started that are physically unsustainable. They would not have been deemed profitable if economic calculation was not thrown out of whack in the boom period.
When I said ‘nothing further happens’, I mean when everything finally becomes clear. The reason I didn’t mention ABCT is because I don’t think it’s actually relevant to what I’m saying. I’m not just trying to gloss over it.
Put it this way: if I counterfeit 100 dollars that is not going to cause a boom and bust cycle. So we can ignore that. There’s no ‘necessary crash’. All that happens is I have 100 dollars worth of purchasing power that I didn’t have before. I go out and buy some gadgetry, and so that’s one sale that wouldn’t have happened otherwise. As this new information percolates through the economy, prices adjust slightly. When all is said and done, I have syphoned off some purchasing power from others. But that’s all. I get the impression that you think problems are caused by some ‘permanent misalignment’ of the ratio of total money to real goods (correct me if I’m wrong). So the new 100 dollar I created represents a permanent problem in the economy that will never go away.
I don’t think that’s the case. I’m trying to argue that I don’t think it matters fundamentally, whether the total amount of bitcoins were arbitrarily decided. If I concede that there is no obvious ‘right’ answer to the total number of bitcoins, I don’t think that means bitcoins cannot work as a medium of exchange after all. The same logic I discussed above still applies, just with different nominal numbers. But once the nominal numbers come to be established, whatever they are, problems can comes in when drastic relative changes occur. So I’m not saying it’s OK to just print a bunch of money, which would change the total amount of money. I’m just saying the problem isn’t that that the total amount of money changed from what it ‘should be’, but rather it just changed relative to where it was. If that makes sense.
Let’s say I counterfeit 100 dollars every 5 years and spend it into the economy. At that rate it would take 50 billion years to counterfeit a trillion dollars.
Instead, let’s say I print one trillion dollars today and spend that. I think we both agree that doing such a thing would cause large issues with misallocations in the current economy.
What I’m asking is, in my first example, do you think the same problems exists after the 50 billion years? That it just took longer for it to get to that point? Or do you think 100 dollars every 5 years is not a rapid enough change over time for it to really matter in the same way, and so there would be no significant problem at that time?
In other words, do you think there is a ‘build up’ of problems? An accumulation of misalignments of the total ratio of money to real goods, causing it to be just as misaligned in 50 billion years as it would be today if we printed a trillion dollars? Or do you think that nominal prices would simply have shifted a lot during that time, but there would be no problems with misallocations?
Assume an otherwise evenly rotating economy (for what it’s worth, I’m not even sure it makes sense but I hope you can see what I’m trying to get at).
The crash comes becomes capital intensive projects were started that are physically unsustainable. They would not have been deemed profitable if economic calculation was not thrown out of whack in the boom period.
The *reason* they were unsustainable is because the paper money prices of interest rates were misleading entrepreneurs into capital-intensive projects that were not justified by consumer preferences:
“Fear the Boom and Bust” a Hayek vs. Keynes Rap Anthem
The Boom gets started with an expansion of credit.
The Fed sets rates low; Are you starting to get it?
That new money is confused for real loanable funds,
but it’s just inflation that’s driving the ones
who invest in new projects like housing construction.
The Boom plants the seeds for its future destruction.
The savings aren’t real; Consumption’s up, too.
And the grasping for resources reveals there’s too few.
So the Boom turns to Bust as the interest rates rise
with the costs of production; Price signals were lies.
It does not matter how fast a company grows, so long as the growth is justified by consumer preferences.
It is not the case that capitalists cause the boom-bust cycle by “investing too much”, as if the boom-bust cycle was a natural feature of laissez-faire activity.
The boom-bust cycle is caused by false price signals.
But if I didn’t even know what I do know, then 100,000 Yen would mean literally nothing to me whatsoever. It only sounds like a lot, but so does 100 trillion Zimbabwean dollars. It’s just a nominal thing.
It’s the last sentence I want to focus on, here.
You say, here, that the quantity doesn’t matter, but you saw it as a problem, earlier:
Also handfuls of dirt may make a bad money for lots of reasons, even if it had a high use-value. Anybody can grab their own handful of dirt since it’s everywhere, and not handfuls will be fungible with every other handful.
While it’s true that the quantity of money doesn’t matter, in theory, the benefit of a more scarce money is its high value-to-weight ratio (or value-to-“ease-of-transport” ratio), and so, in practice, the money voluntarily chosen has been scarce.
In the case of bitcoins being used as a medium of exchange, though, since its value has been arbitrarily assigned, the quantity can never matter.
… since its value has been arbitrarily assigned, the quantity can never matter.
… Even in practice (is what I should have added).
I keep re-reading this but I’m not quite sure what you’re asking. Are you saying that Yen is just like dirt in that it’s everywhere, and you can just grab it? Because clearly that’s not the case.
I don’t think my pointing out a problem with a money good if it’s literally everywhere within arms reach contradicts what I said about 100,000 Yen only sounding like a lot, but that being only nominal. So I don’t get what you’re saying.
And I’m not saying ‘quantity doesn’t matter’. I’m saying that absolute quantity doesn’t matter in some sense of there being a ‘correct total amount of money’. If that total amount of money is different, than nominal prices are established at different numbers, but that’s all. But I think it does matter when it’s a relative drastic rapid in quantity over time, from what has previously been established.
So we can see that if the total amount of money changes, maybe because the government prints a bunch, for example, relative prices get thrown out of whack. This quickly sorts itself out again though, as prices adjust to reflect the change. Economic calculation gets diminished if prices change by too much too rapidly, such as during a hyperinflation.
When miners find new gold in a gold-based monetary society, the same is true, but there is a functional limit so it matters a lot less.
The idea that a rapid increase, per se, in the supply of money diminishes economic calculation, is false, and is not the Austrian position. For example, Austrians reject the idea that the rapid monetary deflation in FRNs during the crash of 1929 was the cause of the Great Depression.
Economic calculation is every bit as achievable, under a commodity money, whether the supply is stable or changes.
Why? Because when the supply of a commodity changes, its real, subjective value to the individuals who use it, changes with it.
Each increase in an individual’s supply of a unit of a good is assigned to lower-ranked preferences. That is, the real (albeit, subjective) price goes down.
No problem with calculation, there. There does exist a way to know the subjective value of a commodity money.
With paper money, which is supposed to be an IOU for money, it is impossible to make calculations even when the prices are stable.
*Economic* calculation requires a relationship between goods which are sold and bought, so it doesn’t matter if the money price is stable if the money doesn’t mean anything (or is arbitrarily assigned, in the case of bitcoins).
guest, the theory you describe here is not the austrian business cycle as described by Hayek.
“With paper money, which is supposed to be an IOU for money, it is impossible to make calculations even when the prices are stable.”
not according to Hayek.
With paper money, which is supposed to be an IOU for money, it is impossible to make calculations even when the prices are stable.
How can that possibly be correct? Wouldn’t that mean our modern economy doesn’t exist? And why? If paper money has purchasing power and is stable (from no money-side inflation or deflation), then why can’t you do economic calculation using it? An entrepreneur can still total up the cost of inputs and expected revenues and decide upon a course of action based on the expected purchasing power he will be rewarded with.
The idea that a rapid increase, per se, in the supply of money diminishes economic calculation, is false, and is not the Austrian position. For example, Austrians reject the idea that the rapid monetary deflation in FRNs during the crash of 1929 was the cause of the Great Depression.
Economic calculation is every bit as achievable, under a commodity money, whether the supply is stable or changes.
Why? Because when the supply of a commodity changes, its real, subjective value to the individuals who use it, changes with it.
Each increase in an individual’s supply of a unit of a good is assigned to lower-ranked preferences. That is, the real (albeit, subjective) price goes down.
No problem with calculation, there. There does exist a way to know the subjective value of a commodity money.
So do you think that a rapid increase in physical gold, say from example from the discovery of a cheap synthesis method, would not cause any problems for a society using gold as money? The extra units flooding into the market, causing rapid changes over time, just get incorporated with people’s marginal utility for using it in industry, and so the price drops massively, but there’s no economic calculation issues? I don’t know. It seems like it would be difficult to use it as money in such a case, and do long term calculation. I think the society would need to use something else as money.
I will get to your earlier arguments, Jack; I haven’t failed to notice them.
While I don’t doubt that Shostak himself understands the regression theorem, and is simply confused as to its application, I see a somewhat concerning number of commentators with little understanding of what the regression theorem actually is, be it on this post or Bitcoin posts elsewhere. Some of the more popular bloggers on the topic seem to, at least from my understanding, completely lack understanding of Mises’ chain of logic. Michael Suede’s article serves as a good example of this.
People would do well to read Konrad Graf’s discussion of the topic, Peter Surda’s thesis, or (shameless plug) my article on it here: http://rumbleyoungman.wordpress.com/2014/03/02/the-economics-of-bitcoin-on-regression
From the RumbleyYoungMan article:
Thus, those libertarian arguments claiming that Bitcoin violates the regression theorem, and will therein implode in some spectacular crash for this reason, must quickly and emphatically be separated from holding any “Austrian” position. It is not, and cannot be the Austrian position, and to associate such claims with the Austrian school is slanderous to a degree.
What is Money? by Gary North
Let us return to the original question: What is money? The best answer to this continual question was provided in 1912 by the Austrian economist, Ludwig von Mises. In his book, “The Theory of Money and Credit,” he provided an answer in six words: money is the most marketable commodity.
Why the Greenbackers Are Wrong (AERC 2013)
Free-market money, therefore, is commodity money.
Your quoting is a blatant straw man. Mises said that money is the most marketable commodity, that I totally agree with. What my article says is that whether Bitcoin is money or not is arbitrary and totally irrelevant to the regression theorem. The RT is concerned with media of exchange. And Bitcoin is doubtlessly one of those, as per the arguments in my article.
As for your Tom Woods link, once again it is irrelevant. You picked a single line of a massive article that has no mention of the RT. Aside from that, I completely agree with “free-market” money being commodity money, but only if you define a commodity as something that either has or once had direct use value (Which I argue is the correct definition. Rothbard gives the example of gold commodity losing direct use value and still being considered a money.) Under this definition Bitcoin must be included in the commodity sphere.
The moment gold were to lose its use-value, it will cease to be a commodity. So bitcoins don’t fit the definition of “commodity”.
(Aside: I understand capital-“B” Bitcoin to be the verification service, while lower-case-“b” bitcoins are the patterns to which values have been arbitrarily assigned. I’m not usually concerned with the service, since it’s the computers doing the service and are those which have the value. So you’ll see me use “bitcoins” vs. “Bitcoin”, a lot.)
And the Regression Theorem does, in fact, have to do with money, rather than merely a medium of exchange.
The use of money is simply another form of indirect barter, anyway.
Once again, as Bob pointed out earlier, should gold lose its direct use value, it could still function as a medium of exchange/money, by Rothbard’s logic (see MES, C4: 5. A). Thus you are faced with a contradiction; either gold with no direct use value isn’t a commodity yet still is a medium of exchange/money, or gold with no direct use value is a commodity yet still is a medium of exchange/money. Either way, insert Bitcoin for gold and the argument is identical.
And the RT does not necessarily have to be about an exchange good that is money, yet it always must be about a medium of exchange. Identifying something as a money rather than a medium of exchange is arbitrary and useless, and isn’t an economic problem per se. Thus it is safer to discuss the RT in terms of media of exchange.
Thus you are faced with a contradiction; either gold with no direct use value isn’t a commodity yet still is a medium of exchange/money, or gold with no direct use value is a commodity yet still is a medium of exchange/money.
I’m not sure how much more clear I can be.
If something doesn’t have a use-value, it’s not a commodity, regardless of whether people attempt to use it as an intermediary exchange “good” (it’s no longer a good at this point).
Having lost its use-value, prices in terms of it can no longer provide information about the subjective-value-link between the goods bought with it and the goods sold for it.
The purpose of all trade (and, in fact, all action) is to make at least a psychic profit.
If you THINK you are making a trade for profit, but in fact are not, then either you got what you asked for in trade and were wrong about its utility, or you were misled by the false price signals sent by the medium of exchange.
If the medium of exchange does not permit you to make subjective-value comparisons between the goods sold for it and the goods bought with it, then it isn’t money – it doesn’t serve the purpose of indirect exchange.
The role of money never deviates from the purpose of barter. It all goes back to barter.
(The purpose of barter, of course, being to lower one’s costs of production. Everyone COULD, in theory, make everything themselves, but the reason we trade is so that we don’t have to – to save labor and time.)
The function of money is to facilitate indirect barter, with all the subjective-value comparisons that are necessary for barter.
I will beat this horse senseless, if you want me to.
Identifying something as a money rather than a medium of exchange is arbitrary and useless, and isn’t an economic problem per se.
If you think that the intermediary thing (or non-thing in the case of a bitcoin) correctly permits you to make subjective value comparisons between the goods you sell for it and the goods you buy with it, then you THINK it’s money, and you ARE in fact using it as an intermediary … thing: a medium of exchange.
Only to the extent that you are correct about your intermediary thing’s ability to permit subjective value comparisons between the goods sold for it and the goods bought with it (without the intermediary good, this would be barter, but the goal is the same in either case), are you correct about the medium-of-exchange’s status as money.
how does ‘fiat’ or credit money stop you from making “subjective value comparisons” between goods?
“Having lost its use-value, prices in terms of it can no longer provide information about the subjective-value-link between the goods bought with it and the goods sold for it.”
You are making a very controversial claim and not backing it up at all. As I said, your claim is not the position that Rothbard takes, as he says that a commodity can lose its direct use value and prices will continue to be set, as the prices may still regress back to a time when there was a direct use value.
I have not seen you, or anyone, challenge Rothbard’s chain of logic sufficiently. You are merely just pulling a claim out of thin air, providing no reason or critique behind it. Explain why prices can no longer be set when there is no direct use value, and explain why Rothbard is incorrect.
Furthermore, you need to address why something that you claim has never had any direct use value, ie Bitcoin, currently has prices being set for it. Unless all those Bitcoin exchanges and their prices are just an illusion?
how does ‘fiat’ or credit money stop you from making “subjective value comparisons” between goods?
Money is an intermediary step between trading away a good and trading for a good for which you have subjectively decided is of greater value than the good you traded away.
Intermediary goods are only desired because they enable a double-concidence of wants.
Why even acquire an intermediary good if you can barter for what you want, directly? You save yourself a step by bartering.
So, the goal is always to profit off of the good you trade away, even if there’s a money in between that process. And you haven’t really profitted until you’ve traded away your money for goods or services (You can’t eat money, as they say).
If the money doesn’t “carry” a subjective value that is lower than the desired good, then you have made a loss.
If the money doesn’t mean anything – if it’s arbitrarily valued, then you can’t compare the value of the good you sell with the value of the good you buy.
Prices come from the network of subjective values people place on units of goods and services. That’s why diamonds are more expensive than water, even though water is more useful.
If money doesn’t have a use-value, you could logically accept bitcoins or handfuls of dirt, and it wouldn’t matter since they would be arbitrarily valued, anyway.
(Aside: Someone, elsewhere on this post mentioned that people would accept some kinds of dirt over others; But that’s a reference to the dirt’s use-value, which proves my point.
([I was attempting to pick something that had zero use-value so that it would be easier to see what was happening with bitcoins].)
As I said, your claim is not the position that Rothbard takes, as he says that a commodity can lose its direct use value and prices will continue to be set, as the prices may still regress back to a time when there was a direct use value.
This is similar to the Socialists’ argument that “If we just set price controls which mimic the prices of the last day of Capitalism, Socialism could be just as productive.”
The Austrian response that “Preferences change” is only effective if there’s supposed to be a link between money prices and subjective value.
The moment a commodity were to lose its use-value is the moment a new, finite regress point is established – one that is established arbitrarily.
If there’s no link to use-value, then on what would the value be based? Why would you need a barter value to regress to if you’re just going to currently value it arbitrarily?
You don’t need a barter value to base an arbitrary value on – that’s what “arbitrary” means.
Furthermore, you need to address why something that you claim has never had any direct use value, ie Bitcoin, currently has prices being set for it.
Someone made a random guess, and others, who don’t understand money, decided that was good enough for them.
Again, you could do the same thing with handfuls of dirt, if you wanted.
Sure you don’t value my handful of dirt right now, but as soon as you arbitrarily choose to, then you can incorrectly say that dirt fulfills the regression theorem.
(Again, I’m ignoring the use-value of dirt for this scenario. It’s so ubiquitous that I think I can get away with using it in this way.)
guest,
your lengthy comment doesn’t explain why ‘fiat‘ or credit money stops you from making “subjective value comparisons” between goods.
I’m sorry, but it just doesn’t.
Philippe,
Let me try this:
I have decided to sell a copy of RoboCop for one handful of dirt.
According to you, it now has an exchange value.
Will you accept a handful of dirt from me as money?
Why or why not?
“Will you accept a handful of dirt from me as money?
Why or why not?”
I wouldn’t, no. Because dirt is not money. Pay me with something I can use as money please!
Bob, how would you apply subjective value theory to the first bitcoin transactions? You say that you don’t know the motivations of the people who participated in those transactions, but do you have any guesses? The only guess I’ve seen from you is that maybe people would be willing to accept bitcoin if it were cheap enough relative to the real goods they were trading for it. But by that logic, couldn’t you say that all fiat currencies could have emerged from people willing to trade for them because they were cheap enough? If that sort of explanation is possible, then isn’t Mises’ regression theorem useless in understanding where money comes from?
You could say that all fiat currencies might have emerged that way, yes, as they don’t violate the regression theorem. But any attempt at reasoning as per why an actor would hold a value scale that places a medium of exchange higher than others is simply pointless speculation. For example, fiat currency regresses back to a point where the first actor traded their good for fiat dollars. Why did the actor take this action? It might be because a government is threatening them with punishment if they don’t. But it may also be for any other conceivable reason, such as the actor enjoys the way they look, or believes they might one day appreciate greatly in value.
That is the whole issue with all this discussion on Bitcoin and the regression theorem. People are constantly speculating on why the first actor would trade their goods for bitcoins, saying reasons xyz are ludicrous. But its irrelevant to the regression theorem. What is important is, as Bob has pointed out, the fact that Bitcoin is and has been used as a medium of exchange, therefore it logically does not violate the regression theorem.
But by that logic, couldn’t you say that all fiat currencies could have emerged from people willing to trade for them because they were cheap enough? If that sort of explanation is possible, then isn’t Mises’ regression theorem useless in understanding where money comes from?
That’s what I’m getting at.
If the purpose of the Regression Theorem wasn’t to show that money has to retain its value as a commodity in order to be considered money, then the Regression Theorem doesn’t tell us anything useful about money.
Why do I care how a money got its value if I can just look at what people were willing to trade for it, yesterday?
(Aside: I realize that when the Regression Theorem was originally advanced, the idea that a money had to retain its commodity-value was not in view, explicitly. But given that no one at the time was content with “yesterday’s price” as an explanation, it’s reasonable to suppose that this was, in fact, why a Regression Theorem was necessary. Even if it wasn’t initially recognized.)
What Austrians need to see is that there can be no such thing as malinvestments if there’s no need for a money to have a current link to use-value.
If we’re all content to arbitrarily value things, then “malinvestments” can be corrected in the next second by simply choosing to value your investments differently.
Just choose to believe everything is hunky-dory, and apparently it is so.
One guy buying one pizza satisfies the regression theorem? Seriously? I now know what the grocer will give me for my bitcoin, and how much gas I can buy, and how many bitcoins the landlord will accept as payment of my rent, because one guy bought one pizza once?
Maybe in Bizzaro World. In reality, what happened was that the guy sold that one pizza went to pay his rent with bitcoins and his landlord told him ‘What is this? What can I do with it? Who can I pass it on to? How much is it worth, if anything?”
“Your questions have already been answered, my son,” said the pizza man. I just sold one slice of pizza for ten thousand bitcoins. Thus bitcoin is now a medium of exchange, the regression theorem has been satisfied, and everyone in the whole wide world, including you, now knows exactly what bitcoin is and what it is worth and what you will be able to buy with it from every shop in the mall two weeks from now.”
“How blind I was,” said the landlord. “Of course you are right.”
[Hint: I am being sarcastic. The reality is that the landlord said “Pay me in dollars or out you go. Don’t you know that Smiling Dave has quoted Mises and others at length, who all say that precondition for being a medium of exchange is WIDE DEMAND.”
“I’m broke right now, Mr Landlord. I put all my money in bitcoins”].
Smiling Dave, what do you think was the actual mechanism by which Bitcoin became a medium of exchange that’s used by a significant number of people?
First Keshav, from your q I deduce that you think I have a point, that one stupid pizza does not a money make.
Which leads you to ask, but it somehow is, as we speak, a medium of exchange. So you ask me how that happened.
See here: http://smilingdavesblog.wordpress.com//?s=wide+demand&search=Go
Short short answer: That’s like asking what do I think is the mechanism by which Santa Claus climbs down the chimney. There is no Santa Claus, and there is no significant number of people using bitcoin.
Most people just hoard the stuff. [At least until mtgox fell. From that point, people are trying to discreetly unload the it]. But there was never a significant amount of people who actually went out and bought things with bitcoins. Were they idiots? Everyone thought it would keep going up forever. Remember, a medium of exchange is the MOST MARKETABLE good [said Mises and Menger], something almost everyone prefers to anything else.
Read my articles, my son, where I humbly lay out with logic and with quotes from Mises and others, that bitcoin is nowhere near being a medium of exchange.
BTW, besides not satisfying the regression theorem,
bitcoin violates Their’s Law, [http://smilingdavesblog.wordpress.com/2013/10/16/the-kickstart-fallacy/ ]
and is not even an economic good [ http://smilingdavesblog.wordpress.com/2014/03/29/why-bitcoin-is-not-even-an-economic-good-much-less-money-or-a-medium-of-exchange/%5D .
And fourth of all, it violates a corollary of Gresham’s Law [http://smilingdavesblog.wordpress.com/2013/10/18/why-greshams-law-means-the-death-of-bitcoin/]
“Mises and others, that bitcoin is nowhere near being a medium of exchange.”
It is used as a medium of exchange, and that is undeniable.
That it is not a general medium of exchange like the US dollar does not refute the fact that people do use it as medium of exchange.
As for Menger, your understanding of his monetary theory is wretchedly ignorant.
Menger actually conceded that a government might establish something as a medium of exchange and his theory is far from the extremism of Mises or Rothbard:
“It is not impossible for media of exchange, serving as they do the commonweal in the most emphatic sense of the word, to be instituted also by way of legislation, like other social institutions. But this is neither the only, nor the primary mode in which money has taken its origin.”
Menger, C. 1892. “On the Origin of Money” (trans. C. A. Foley), Economic Journal 2: 238–255, at p. 250.
“Like other social institutions, the institution of intermediaries of exchange, which serves the common good in the fullest sense of the term, may, as I shall explain later, emerge or be promoted, but also impeded, in its automatic development by the influence of authority (for example, public or religious) and especially by legislation. This manner of emergence of media of exchange, however, is neither the only nor the earliest one. Here, a relation exists similar to that between statute law and common law: media of exchange originally emerged and eventually, through progressive imitation, became generally used not by way of law or agreement but by way of ‘custom’, that is, through similar actions, corresponding to similar subjective impulses and similar intellectual progress, of individuals living together in society (as the unreflective result of specific individual strivings of the members of society) – a circumstance which subsequently, as with other institutions that arose in like manner, does not rule out, of course, their being established or influenced by government.” Menger, C. 2002 [1909]. “Money” (trans. L. B. Yeager and M. Streissler), in M. Latzer and S. W. Schmitz (eds.), Carl Menger and the Evolution of Payments Systems. Edward Elgar, Cheltenham, UK. 25–108, at p. 33.
Bitcoin Takes a Beating
One may ask, then how come they were traded on certain websites at $33 a bitcoin? P.T. Barnum provided the answer. There’s a sucker born every minute. A small handful of people decided to speculate in bitcoins and bought them at whatever silly price they thought was worth it. But bitcoins were never generally accepted at any price but zero. They have no reason to be.
A friendly caution to Smiling Dave, though: People might continue to be silly and bitcoins may become generally accepted.
This is not a problem for my position since I consider general-acceptedness to be a necessary, but not sufficient, quality of money.
1. What we see has been the case until now is that bubbles last for a certain time, then burst. Even a bubble so widely prevalent as the last housing bubble finally burst. And there are economic laws that ensure this will always happen, that bubbles will always burst, that market fads and follies and manias eventually end.
A bubble is, as Bob defined it elsewhere, when most people are buying something not because they need it, but to sell later to the next sucker. Describes bitcoin to a T, because nobody needs bitcoins at all, especially now the truth is out that the govts can trace every last bitcoin transaction, laptop by laptop until they find Satoshi himself, down to the last penny, and will tax all bitcoin profits as capital gains.
2. I take issue with the word “continue” that you used. Bitcoin is not generally accepted now, far from it, so it cannot continue to be generaly accepted.
3. I have a guess as to who you are, a good buddy of mine on the libertyhq forums. Will gladly continue there if you wish. Don’t want to clutter Bob’s website.