10 Mar 2014

On Bitcoin and Ludwig von Mises’ Regression Theorem

Bitcoin 58 Comments

My talk at the Texas Bitcoin conference revolved around the Austrian approach to money, and why some Austrians (quite understandably) were uncomfortable with Bitcoin. (Apparently you have to pay $50 if you want access to all of the videos, which is worth doing if you want to learn a lot about Bitcoin. But the content of my particular talk can be cobbled together from other things I’ve written previously.) I concluded that even though there is a superficial tension, Mises’ regression theorem really has no bearing today on whether Bitcoin has the ability to become money.

In this post I’m going to dive into the details, but if you want a more thorough grounding, (A) read either my short article on Austrians and money, or the longer Chapter 8 in my Study Guide to Mises’ Theory of Money and Credit, and then (B) read my EconLib article on the economics of Bitcoin. Assuming now that everyone has this background, let’s hopefully dispose of this particular objection once and for all. (There may be other problems with Bitcoin.)

It was necessary for Mises to come up with his regression theorem–which traced the purchasing power of money back to the time at which it was valued as a mere commodity in direct barter–in order to ensure that his application of subjective value theory didn’t set up an infinite regress. Since Mises was ultimately explaining today’s purchasing power of money by reference to observations of its purchasing power yesterday, it seemed that he was merely pushing back the problem one step, but not really explaining the value of money in a logically complete way. Yet Mises pointed out that it was not an infinite regress; once we reached the historical point at which the money good was used in direct exchange, then standard price theory took over and the regress stopped.

So, what relevance does this have to Bitcoin? The short answer: none whatsoever. There is no question that people today have a way of estimating the purchasing power of Bitcoin; they can look up the spot price online. If we object that the current price is largely dependent on yesterday’s price, then we start back with the regress. And where do we stop? In early 2009 when the first Bitcoin transactions were negotiated, including a pizza that sold for 10,000 BTC.

If Austrian economists want to say, “But those people had no basis for saying whether that pizza should have been 100 BTC or 1 million BTC!!” OK fair enough. But they did decide, somehow; those initial transactions provided a frame of reference that guided subsequent transactions involving bitcoins. If you want to argue that this odd origin means that subjective value theory can’t be applied to Bitcoin, OK, then so much the worse for subjective value theory.

People right now are exchanging bitcoins against “real” goods and services, and the sellers intend to use at least some of the acquired bitcoins to obtain other “real” goods and services down the road. There is no question that Bitcoin is currently a medium of exchange, though I would not christen it a money yet.

Some people concede that Bitcoin could exist temporarily, but that it would by its very nature be in a bubble with a fundamental value of zero. OK, but by the same token then, the US dollar has been in the same situation for 43 years, and the only reason this is in peril is that the authorities have been printing more dollars with reckless abandon (something that can’t happen under Bitcoin). So when people say, “Bitcoin will never last as money,” are they conceding that yes it might be the world’s reserve currency for a half century?

In conclusion, Ludwig von Mises’ regression theorem has nothing to say about the empirical question of whether Bitcoin will move beyond a medium of exchange and become a true money. If you think that subjective value theory somehow “proves” that a digital currency can never get off the ground because nobody would have any experience with which to evaluate it, then you are simply wrong; it happened in 2009.

58 Responses to “On Bitcoin and Ludwig von Mises’ Regression Theorem”

  1. Tel says:

    There is value in being able to trade, based on division of labour. If bitcoin makes this easier, then Bitcoin is useful. Why do you think so many businesses buy computer systems to run customer databases, web shoppers, CRM, online trading and so on? Because those things are useful to facilitate trade.

  2. Hank says:

    Dear Keshav,

    I would like you to know that I read the paper told me to read. The author himself, who you seemed to enjoy, indirectly answers “why Mises did not write Human Action in the same style as Euclid’s Elements.” Namely he doesn’t think praxeology is even axiomatic to begin with.


    • GeePonder says:

      Thanks Hank & Keshav(?) for posting the paper. Very good read.

      • GeePonder says:

        A friend has pointed out that a quotation on page 10 of the article that is attributed to Mises is completely missing from his and my copies of Human Action:

        On page 10 of the article, the author refers to a “scarcity theorem” and writes:

        What is the scarcity theorem? The scarcity theorem, of course, links the foundations of economic theory with action theory and reads very simple: ‘[A]ction is the manifestation of scarcity […].’ (Mises 1949: 70)

        The author implies that the “scarcity theorem” is well-known and he references the 1949 edition of Human Action, page 70, unless I am mistaken.

        I can’t find this passage or anything like it on the referenced page. I see instead the line “Action is a display of potency and control that are limited.”

        Am I overlooking the passage somewhere?

        • GeePonder says:

          Check it yourself. The quotation doesn’t exist. I have emailed the author to ask where the quotation came from. The quotation is the foundation for one of the author’s proofs in his paper.

          It would be good for the author’s position should the quote exist.

          • GeePonder says:

            From the author:

            the full quotation reads „Action is a display of potency and control that are limited. It is a
            manifestation of man who is restrained by the circumscribed powers of his
            mind, the physiological nature of his body, the vicissitudes of his environment,
            and the scarcity of the external factors on which his welfare depends.” (Human Action, 4th ed. P. 70)

            The thus abridged quote is closer to the German original: „Handeln ist ein Ausfluss der Beschränktheit und Knappheit“ (Nationalökonomie, p. 65), which, as usual, is the more reliable source to Mises’s thinking in his classical period.

  3. Hank says:

    The reason, I think, many people have trouble with the regression theorem, is because they view confuse praxeological matters with empirical matters. I think, correct me if I am very wrong, that whether or not something is money is largely an empirical question, viz. “What is the most sale-able good in the economy at this moment?” We could also view EVERY good as having a certain money “aspect”. In this view, every conceivable good would have a certain percentage money aspect. Although I concede I don’t know how this would really work.

    I really don’t know whether the regression theorem itself is considered a praxeological proposition. In which case, shouldn’t it be known as the “regression law”, not the “regression theorem”?

  4. Keshav Srinivasan says:

    Bob, can you just clarify, does the regression theorem say “Any medium of exchange had a previous use as something other than a medium of exchange?” If it does say that, then I don’t see how it could possibly be compatible with the existence of Bitcoin. Am I missing some subtlety in the statement of the regression theorem?

    • Hank says:

      Yes, namely that your definition of “use” is too narrow. A “use” for a person may be merely the desire to own a novelty item.

    • Keshav Srinivasan says:

      Another thing confuses me: aren’t the predictions of praxeology supposed to be couched in unfalsifiable counterfactual terms? So where is the invocation of counterfactuals in the statement of the regression theorem? It seems to me to be a falsifiable statement.

      • Ken B says:

        If you read between the lines I think Bob is disavowing the regression contention. He says that has nothing to do with bitcoin. He does not say the reverse.

      • Hank says:

        WARNING: Don’t use the word prediction. You will stir up a lot of because of the ambiguity of this word.

        I remember Block stating he thinks regression theorem was praxeological, but I don’t know where.

      • Major_Freedom says:

        Praxeology doesn’t make predictions.

        It concerns the logical relations derived from action that are always true for action.

        Am I predicting the future when I say that all plane right triangles will always be consistent with Pythagorean’s relation? No, because I am not predicting the existence of plane right triangles.

        To argue that a particular logical relation will always hold true, is not to say that it will always be observed.

        • Harold says:

          “To argue that a particular logical relation will always hold true, is not to say that it will always be observed.”

          Or indeed *ever* be observed. This seems to me to be a problem with praxeology.

    • Matt M (Dude Where's My Freedom) says:

      We’ve discussed this before. Bitcoin did have a previous use as something other than a medium of exchange. Perhaps as a cool science experiment. Perhaps as a test of various cryptology mechanisms. Perhaps as some sort of “nerd cred” badge of honor. Point is, even prior to the BTC-Pizza exchange Murphy described, even assuming that was the first time BTC was actually used as a medium of exchange, it is quite obvious that someone valued BTC for some reason in the first place, even though it had never been used as a medium exchange before.

  5. Major_Freedom says:

    It’s the most easy thing in the world to know that Bitcoins will not, cannot, ever in a million years refute the regression theorem.

    1. Bitcoins are not currently a generally accepted medium of exchange. We can SEE this. RIGHT NOW.

    2. If Bitcoins were ever to become generally accepted, we will know it first went through step 1., which means there is no other course for Bitcoins to take than either continuing as something other than a generally accepted medium of exchange, or as a medium of exchange!

    Seriously, what is the big deal? It’s so obvious!

  6. Transformer says:

    I think bitcoin may derive its value from a value-add if provides over conventional currencies – the ability to transact online anonymously. Once bitcoin had been established as a reliable means of transacting anonymously it would have a use value above zero for this service alone. And as the number of transactions has increased so would its value.

    I think a large part of its value may arise purely from “transaction demand” . I am guessing that many people who transact in bitcoin just convert from $$$ (or some other normal currency) into bitcoin to buy stuff, and convert back to $$$ after selling stuff. In other words its velocity is very high.

    However there has also emerged a “speculative” element where people think that the value will continue to go up as transaction demand continues to rise. So they hold bitcoins much like people may hold stock in facebook.

    I think the big danger for bitcoin is that the service that gives it fundamental value – the ability to transact online anonymously may be undermined. If this happened via state intervention I can see its value falling very quickly as people would probably no longer want to transact in it.

    Based on the bitcoin precedent it would be nice to think that other private electronic currencies could emerge that had other attributes that would give them value over conventional currencies (I’d would keep my savings in an currency that was guaranteed not to inflate away for example).

    • skylien says:

      For me it is everything but anonymous.

      1: They already caught the Silk Road guy. And if he can’t do it how should I be able to stay anonymous. I mean they are literally able and willing to spy me though my own webcam!

      2: BTC RECORDS every single transaction publicly. This means just one little mistake and your whole BTC history might be revealed.

      3: You can’t use exchanges. Exchanges won’t be allowed to exist if they transact with anonymous people.

      4: It at best is useful as anonymous money for illegal stuff or non-tangibles. You cannot order at Amazon anonymously, I mean where would they ship the goods?

      So I guess for well over 95% of all transactions the in my view highly questionable anonymity that BTC actually is able to provide is absolutely useless.

      • Matt M (Dude Where's My Freedom) says:

        Well, regarding your points 1 and 2, “one little mistake” is how they caught the silk road guy, after several years and a ****-ton of resources trying. My understanding is that they never “cracked the code” and compromised TOR or BTC or anything like that. They just used traditional detective work and found a place where he got sloppy protecting his own identity.

        As far as I know, nobody actually using Silk Road for buying or selling has been caught or prosecuted, presumably because it just isn’t worth the hassle.

        • skylien says:

          I don’t know how they caught him. That may be right. I just think that I cannot keep up with the NSA if it is about hacking. And I wouldn’t feel comfortable that all my transactions are public forever even if at this moment no one could track them to me.

          • Matt M (Dude Where's My Freedom) says:

            But the point is, unless you’re the ringleader of the Silk Road, you don’t HAVE to “keep up with the NSA” because they don’t have the time or the desire to devote the resources towards tracking down every buyer and seller on the Silk Road, only the ringleader.

            Much like how the vast majority of steet-level buyers and sellers of marijuana don’t get hassled by the cops, only smugglers and cartel leaders do.

            IIRC it wasn’t even “about hacking” with the Silk Road guy either. It was him making some dumb mistake and leaving a trail that was easily tied to his real name.

  7. guest says:

    There is no question that people today have a way of estimating the purchasing power of Bitcoin; they can look up the spot price online. If we object that the current price is largely dependent on yesterday’s price, then we start back with the regress. And where do we stop? In early 2009 when the first Bitcoin transactions were negotiated, including a pizza that sold for 10,000 BTC.

    If Austrian economists want to say, “But those people had no basis for saying whether that pizza should have been 100 BTC or 1 million BTC!!” OK fair enough. But they did decide, somehow; those initial transactions provided a frame of reference that guided subsequent transactions involving bitcoins. …

    People right now are exchanging bitcoins against “real” goods and services, and the sellers intend to use at least some of the acquired bitcoins to obtain other “real” goods and services down the road.

    This misses the point. There is a distinction to be made between inherent value (nothing has inherent value) and arbitrary value, where people make claims about the utility of some thing even if that thing cannot provide said utility in the real world. Yes, it is possible to make arbitrary trades, but the function of MONEY is to enable a double-coincidence of wants for goods from which people derive real utility.

    What logically follows from your argument is that ANYTHING can be money merely because people BELIEVE it is worth X.

    So, for example, you should have zero problem with taking a piece of paper I write some numbers on as worth everything you own, and doing so every single time I offer it. Because, after all, all it takes is for one to believe in it enough to make a trade.

    Then, after the arbitrary trade is made, you can tell people that “Hey, this piece of paper was actually traded for everything I own, so therefore it is worth all the stuff I used to own; This is why you should all consider this paper to be money.”

    Just because something is thought to be money doesn’t make it so. I maintain that bitcoins have always been a fraud (even if unintentionally so).

    The only decent argument I’ve read so far in support of bitcoins being money, is the argument that it started out as art. That would be enough for me if it were true, but it’s not.

    The art value of bitcoins was always predicated on the belief that it was money – that’s WHY it was considered art.

    So, if bitcoins were never money, then it was never the art people thought it was, either.

    I saw the “bitcoins as art” argument in the following article:

    The Money-ness of Bitcoins

    “At their inception, bitcoins were created and first held within a “crypto-punk” community. It could then be safely assumed that they served the purpose of conveying a specific antiestablishment worldview. The first demand factor, initially for producing bitcoins, and then unavoidably but only indirectly for holding them, was rooted in their capacity to project a certain point of view. In a sense, bitcoins were comparable to an artistic medium of expression, such as music, literature, and painting.”

    Notice that the “antiestablishment worldview” being expressed by bitcoin was that money should not be controlled by the establishment. Bitcoins were always intended to function as scrip that could not (?) be meddled with. And since it never had a use-value, it has never and will never be money – even though people trade it for stuff.

    It is necessary, but not sufficient, for people to consider something to be a medium of exchange in order for that thing to be money.

    Please consider these articles:

    The Bitcoin Money Myth

    Bitcoin, all in one place.

  8. skylien says:

    Great post!

    “So when people say, “Bitcoin will never last as money,” are they conceding that yes it might be the world’s reserve currency for a half century?”

    And yes I think it cannot last as money (at least without govenment “help”), and yes I concede that, as I have argued this specifically myself already.

    • Matt Tanous says:

      >I think it cannot last as money (at least without govenment “help”)

      How does government “help” affect Bitcoin?

      • skylien says:

        I meant that in two ways:

        1: “Help” in its proper sense: Like (very very unlikely though) the USG declaring BTC legal tender and dismissing the USD.

        2: “Help” by increasing financial repression, which would increase incentives to look for alternatives to the USD, while at the same time shutting down any other alternatives (e-gold etc…) without being able to shut down BTC. That is what drives BTC currently, and also a good chunk of bubble mentality.

  9. skylien says:

    Question to Keynesians and Market Monetarists:

    I guess you will be spared to do this since the convenient existence of anti-money-laundering laws etc will probably keep BTC in check anyway. So it will probably never have a chance to threaten the USD.

    However are you willing to concede that if it weren’t for this fact and of course in the case BTC would actually become popular among more and more people that at some point you would have to argue something like this:

    “I demand an immediate and absolute ban of BTC, since its increasing popularity threatens our ability to actively macro manage the economy. Without ability to lower interest rates and bail out system relevant institutions we would see the return of severe depressions with double digit unemployment that needed ages to recover from naturally if at all! We also could not guarantee that the government will always pay its (nominal) debts. Therefore we demand that no referendum is held about this, since the ordinary citizen cannot be trusted to know what is good for him, and that people who violate against this ban are prosecuted and punished with adequate sentences.”

    • Transformer says:

      As far as Market Monetarists go: as long as there was a way of measuring the contribution of BTC transactions to NGDP then I don’t think much would change.

      Some MMers are free bankers who support BTC-type money. I have even seen discussion as to how a free currency might actually embody NGDP-stabalizing algorithms.

      • skylien says:

        Right, that is not directed at Free Bankers. Free Bankers cannot control NGDP.

        For the non Free Bankers: It is not enough to be able to measure BTC’s contribution to NGDP. If you want to control NGDP you need the USD to be the dominant currency. If its market share drops too far or vanishes completely, there is no way of keeping NGDP on whatever track.

        • Keshav Srinivasan says:

          Why do you need the dollar to do NGDP tracking? From what I understand from Scott Sumner’s position, all you need to do is create a liquid NGDP futures market. What you denominate the price of those futures in, whether dollars or Bitcoin, is immaterial.

          • Keshav Srinivasan says:

            NGDP targeting, not tracking

          • skylien says:

            NGDP targeting means using the same tools the FED uses now. Buying and selling bonds by the FED and therefore shrinking/increasing the base money supply.

            How would that work if there is no USD but only BTCs?

            • Matt Tanous says:

              Buy and sell BTC in large quantities. It’s more difficult because it requires a government that has fiscal discipline actually implementing a Keynesian “reverse cyclical” policy – but if BTC becomes the general medium of exchange, that would be necessary anyway.

              • Matt Tanous says:

                The fiscal discipline, not the counter-cyclical policy.

              • skylien says:

                This means the policy could basically target at best a stable NGDP (not a growing NGDP path). It would also mean that the government to be able to increase NGDP in times of decreasing NGDP would at first either need to safe BTC or borrow them to build a fund to do this in a sufficient quantity. However to do this (saving or borrowing) is causing… a decreasing NGDP to the same degree as it allows you to pump NGDP later on.

                So according to this theory at first you already have to induce a recession to even build such a fund. Then you have to let the free market work out this recession. This is because if you would already start to load off your fund to stop that self-inflicted recession your fund is gone, the recession as well, but you are back to square 1. Means you have no ability to counter a not self-inflicted recession. So after you have built a fund and the market overcame the recession itself and works “normally” now on that lower NGDP level, you can then start to stabilize it at that level to the degree your fund is big enough.
                Is that what you have in mind?

  10. Dan (DD5) says:

    There is nothing, absolutely NOTHING in Bitcoin that refutes the Regression Theorem. In fact, quite the contrary, Bitcoin has thus far precisely followed the process described by Mises’ Regression Theorem.

    All the regression theorem has to say is this: In the first transaction Bitcoin was involved in, it was NOT a medium of exchange by any account or definition. Someone valued the first 10K or so arbitrarily, NO different than when someone values a painting of some artist and exchange it for money. No authorty decreed the value of the first Bitcoins. There was no committee that said: 1BTC=$1 or whatever. That would be a violation of Mises’ Regression Theorem. That did NOT happen. Someone valued it, i.e. exchanged money for it. From that moment, that painting has a market value as long there is another person who values it and is willing to exchange for it.. That is all! The psychological reason or motives, and even the chance involved, behind why the first pioneers valued the first Bitcoins (just like painting of the artist) are irrelevant. It does not matter that the creator was set out to create money. His motives are irrelevant. The first Bitcoins was not valued as medium of exchange. It could not have been since it was not yet a medium of exchange. Now, this Bitcoin can become a medium of exchange like any other commodity on the market. it can even even become money as more and more people value it for it’s exchange value on the market rather than its direct use value (which i practically 0 in this case). The regression Theorem describes this process – from exchanged as a commodity that is not a medium of exchange to eventually exchanged as money.

    • Keshav Srinivasan says:

      “The first Bitcoins was not valued as medium of exchange. It could not have been since it was not yet a medium of exchange.” I don’t understand this. Couldn’t the first Bitcoins have been valued because people believed they would be used as a medium of exchange in future?

      • Matt M (Dude Where's My Freedom) says:

        Sure, but so what?

        It’s also possible that at some point, prior to it ever being actually used as a medium exchange, one specific individual valued gold NOT for any decorative or industrial or productive purpose, but because they speculated that others might value it in the future.

      • Dan (DD5) says:

        Yes, and that’s probably why that first person valued those Bitcoins in the first place. It was mere speculation. But not because it was already a medium of exchange. Even if he believed it was already a medium of exchange (and I’m not suggesting he did), that still would not make it so, no more then 1+1=3 because I believed it to be so.

        If he was the first person to ever buy Bitcoins, that is, the first person to ever truly value them, then you cannot ever say that those Bitcoins were already a medium of exchange when he bought them. That would imply that they had a prior market value before that initial transaction. Obviously, they did not. He valued them first. So Bitcoins could not have started as a medium of exchange, but of something else. That something else could be anything. Nothing in the Regression Theorem says it has to be something that you can eat or turn into jewelry, or inhale into your lungs, or whatever… Just that it starts as a commodity that is not originally a medium of exchange.

        • Keshav Srinivasan says:

          So you’re saying that the Regression Theorem is completely compatible with the origin of paper money being that some guys created it and valued it because they thought it would soon become a medium of exchange?

          • Ken B says:

            ooooooooooooooo. Bravo.

          • Dan (DD5) says:

            Yes. If that paper money originated on the free market, that is, not by fiat. It’s just that it’s extremely unlikely due to it’s lack of intrinsic characteristics that are typically inherent to money.

  11. Ken B says:

    Bob’s summary of this passage is clearer than the original, but otherwise seems spot on.

    Now the extent of that part of the demand for a medium of exchange which is displayed on account of its service as a medium of exchange depends on its value in exchange. This fact raises difficulties which many economists considered insoluble so that they abstained from following farther along this line of reasoning. It is illogical, they said, to explain the purchasing power of money by reference to the demand for money, and the demand for money by reference to its purchasing power.

    The difficulty is, however, merely apparent. The purchasing power [p. 409] which we explain by referring to the extent of specific demand is not the same purchasing power the height of which determines this specific demand. The problem is to conceive the determination of the purchasing power of the immediate future, of the impending moment. For the solution of this problem we refer to the purchasing power of the immediate past, of the moment just passed. These are two distinct magnitudes. It is erroneous to object to our theorem, which may be called the regression theorem, that it moves in a vicious circle.[8]

    But, say the critics, this is tantamount to merely pushing back the problem. For now one must still explain the determination of yesterday’s purchasing power. If one explains this in the same way by referring to the purchasing power of the day before yesterday and so on, one slips into a regressus in infinitum. This reasoning, they assert, is certainly not a complete and logically satisfactory solution of the problem involved. What these critics fail to see is that the regression does not go back endlessly. It reaches a point at which the explanation is completed and no further question remains unanswered. If we trace the purchasing power of money back step by step, we finally arrive at the point at which the service of the good concerned as a medium of exchange begins. At this point yesterday’s exchange value is exclusively determined by the nonmonetary –industrial–demand which is displayed only by those who want to use this good for other employments than that of a medium of exchange.

    Bitcoin was not valued for purposes other than the hope it would become a medium of exchange. It was crafted with that sole goal in mind. As Tel nicely summarizes it, a bitcoin is part of a piece of software that can lower transaction costs by serving amongst users of that software as a medium of exchange.

    • Matt Tanous says:

      Actually, Bitcoin was crafted to “allow online payments to be sent directly from one party to another without going through a financial institution.”

      It wasn’t meant to be money necessarily, but simply to sidestep the banks.

  12. Smiling Dave says:

    Just to show you one serious flaw of many in Bob’s article, he writes:

    “And where do we stop? In early 2009 when the first Bitcoin transactions were negotiated, including a pizza that sold for 10,000 BTC.”

    From my humble blog:

    SD: OK, time to explain the whole thing from first principles.

    What is money, according to Austrian Economics?

    Ludwig von Mises: Money is the universally used medium of exchange, nothing else.

    What’s the point of even having money in an economy? Why did people start using money, and why do they still use it today?

    LvM: A man who finds it hard to obtain in direct barter what he wants to acquire renders better his chances of acquiring it in later acts of exchange by the procurement of a more marketable good.

    DA: What does that mean in English?

    SD: Very simple. It means a medium of exchange has to be more marketable than most things. It has to be in wide demand. And that’s part of the very definition, the very raison d’etre, of a medium of exchange, and certainly of a money.

    Now you can argue about exactly how many things it has to be more marketable than, and exactly how much more marketable. But it certainly has to be more marketable than AT LEAST ONE THING.

    When that guy traded his bitcoins for a pizza, what was bitcoin more marketable than? Apples? Oranges? Pork bellies? More marketable than what? Answer: Nothing.

    So that pizza trade had nothing to do with satisfying the regression theorem.

    • Matt Tanous says:

      ” It means a medium of exchange has to be more marketable than most things. It has to be in wide demand.”

      No, it doesn’t. MONEY has to be in wide demand. A medium of exchange does not – in fact that is the very distinction of “general use” that Mises makes.

      “When that guy traded his bitcoins for a pizza, what was bitcoin more marketable than? Apples? Oranges? Pork bellies? More marketable than what? Answer: Nothing.”

      When that first guy traded gold for whatever it was he traded it for, what was gold more marketable than? Answer: Nothing. By definition, the first trade of a good is when it has effectively ZERO marketability. This is why it is the first time someone accepted it.

      “So that pizza trade had nothing to do with satisfying the regression theorem.”

      The regression theorem does not regress back until something is marketable. It regresses back until the price was solely determined by non-exchange demand. Which it was when that guy traded Bitcoin for pizza (if not for some time after that). Ostensibly, the pizza was traded for the Bitcoin as a technical curiosity, according to the subjective valuations of the individuals in question.

      As of now, Bitcoin’s demand is in both its exchange value (marketability), as well as investment/speculation. Like gold would be if it were a medium of exchange!

      Your failure to understand the regression theorem – and your conflation of it with Menger’s marketability analysis – is frankly astounding.

      • Smiling Dave says:

        You have not read my articles, have you?

        Search my humble blog for the phrase wide demand

    • Peter Šurda says:

      The sale of the pizza was the consequence, rather than a prerequisite, of high marketability. I explain this in several of my blog posts.

  13. Peter Šurda says:

    While I agree with you Dr. Murphy, I’d also like to add that your argument is incomplete, because you only address the question of prices but neglect the far more important question of liquidity. Economists knew before Menger that a medium of exchange needs a price to work. But Menger realised that it also needs liquidity. This is a groundbreaking realisation that even now many Austrians do not understand. This is also why Mises, in his formulation of the theorem, says that a medium of exchange needs to have EXCHANGE VALUE rather than just VALUE. I think I sent you a draft of my paper, maybe you can look at it?

    • Bob Murphy says:

      Gah sorry Peter, I still haven’t read it. It’s sitting on my computer’s desktop, taunting me.

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