26 Jan 2017

Free to Exchange: Salter and Luther on Financial Regulation and Bitcoin

Bitcoin, Economics 4 Comments

Ben Powell hosts a local public access TV show, but he was out of town so let the inmates run the asylum.

4 Responses to “Free to Exchange: Salter and Luther on Financial Regulation and Bitcoin”

  1. Josiah says:

    I thought you had a beard now.

    Are you using a body double?

    • Bob Murphy says:

      Structure of production. (For the video, not my beard.)

      • Andrew_FL says:

        For a minute there I was excited your beard might grow and recede inversely with the rate of interest.

  2. guest says:

    I skipped to the bitcoin segment since that’s what I wanted to talk about.

    Saying that bitcoin “lowers transaction costs” is actually not saying enough, since transacting in handfuls of dirt will lower transaction costs, too: all you have to do is go outside and grab some.

    It turns out that Rothbard unknowingly took down the concept of a non-commodity money (such as bitcoins), as well as his own assessment that a commodity can lose its use-value and still qualify as a money (oops).

    (My position is that only commodities can be money and that the Regression Theorem holds if understood correctly.)

    Rothbard, discussing the Regression Theorem:

    “It is obvious that this vitally important problem of circularity (X depends on Y, while Y depends on X) exists not only in regard to decisions by consumers but also in regard to any exchange decision in the money economy.”

    Rothbard correctly considers this a problem to be solved. But then he says, discussing how a commodity can lose its use-value and still be a money:

    “If on day X gold loses its direct uses, there will still be previously existing money prices that had been established on day X – 1, and these prices form the basis for the marginal utility of gold on day X. Similarly, the money prices thereby determined on day X form the basis for the marginal utility of money on day X + 1. From X on, gold could be demanded for its exchange value alone, and not at all for its direct use.

    For a former commodity that is not anywhere valued for its utility, there can only be two sources of its valuation.

    The first is that someone else values it. But this only pushes the problem back, and still needs to be answered in order to avoid the “problem of circularity” Rothbard mentioned earlier.

    The second is that there is someone on Day X+1 who has based that day’s price on a now invalid yesterday’s price – invalid because the former commodity lost its use-value. Any valuation derived from this invalid price, then, must cause some kind of malinvestment.

    This is why bitcoins are a bubble. The same can be said about all fiat currencies.

    The reason the Regression Theorem holds, in spite of Rothbard’s contradiction on this one issue, is that prices aren’t just determined by past prices, but on anticipated prices – people use the past prices, along with other information, to assess the likely valuations of others for a given good.

    Why should the price of anything in terms of a “money” that has no use-value ever go down if you can still use it as money? As long as it’s being traded, it’s still got “exchange value”, after all.

    Only something with existing use-value can solve Rothbard’s oversight.

    This is not to say that anything at all can be *thought of* as a money, and circulate until the fraudulent currency corrects itself to its real value of zero. That’s how Ponzi schemes work, after all.

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