I'll start with a quote from Mises in Money and credit, emphasis mine:
The Necessity for a Value Independent of the Monetary Function before an Object can serve as Money
If the objective exchange-value of money must always be linked with a pre-existing market exchange-ratio between money and other economic goods (since otherwise individuals would not be in a position to estimate the value ofthe money), it follows that an object cannot be used as money unless, at the moment when its use as money begins, it already possesses an objective exchange-value based on some other use. This provides both a refutation of those theories which derive the origin ofmoney from a general agreement to impute fictitious value to things intrinsically valueless' and a confirmation of Menger's hypothesis concerning the origin of the use of money. This link with a pre-existing exchange-value is necessary not only for commodity money, but equally for credit money and fiat money.' No fiat money could ever come into existence if it did not satisfy this condition...
OK, now for the Ithaca Hour. It is a fiat currency, used in Ithaca, New York and for 20 miles around that city.
Links:
Wikipedia: http://en.wikipedia.org/wiki/Ithaca_Hour
Home Page: http://www.ithacahours.com/
How it got started: http://www.ithacahours.com/archive/0001.html
Cute cartoon: http://ithacahours.com/weprint.jpg
Two quotes:
...on October 19, I bought a samoza at the Farmer's Market with Half HOUR #751 from from Catherine Martinez-- the first use of an HOUR. Neither of us knew what a Half HOUR was worth, since the $10/HOUR rate was then merely suggested.
...He established that each HOUR would be worth the equivalent of $10, which was about the average hourly amount that workers earned in surrounding Tompkins County,[8] although the exact rate of exchange for any given transaction was to be decided by the parties themselves.
Seems to refute Mises' regression theorem. Would appreciate enlightenment.
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It's easy to refute an argument if you first misrepresent it. William Keizer
I think I have the answer to why both Ithaca Hours and Bitcoin are not money. Voila:
If you and your kid sister set up a system of paying each other for lollipops with tarot cards, that doesn't make tarot cards money, right? And why not? Because money has to be something accepted 1. by a whole community 2. in exchange for anything and everything. That's what medium of exchange means. [So it's not a "no true Scotsman" argument]. When everything has a price in tarot cards, for a large group of people, not just a few close friends, then they can be legitimately called money. Bitcoin is not money yet, because there is no community, [even if we call a group of people connected by computers a community], who will buy and sell everything for bitcoins. Same for Ithaca Hours. In my posts, I tried to get across why it will never be a money in the above sense [=medium of exchange].
I think you are oversimplifying the regression theorem. Mises is explicit in saying that in order for money to have value the commodity (or whatever makes up said money) has to have some previous value. That is, the value of money comes from the value of something else. In bitcoin's case, that something else is the dollar.
Yes, bitcoins derive their value from the expectation that one may readily exchange them for actual money (money proper), i.e. dollars. In this sense, bitcoins sort of function like secondary media of exchange, but they're not employed nearly as regularly as traditional secondary media of exchange (precious metals, securities, etc). Thus, we can say that bitcoin are essentially tertiary media of exchange.
But money is defined as a commonly employed media of exchange, which means that, by definition, bitcoins are not money. Your grocer will not accept bitcoins, laborers will not accept bitcoins as payment, etc, etc. In order for bitcoins to emerge as actual money, in a way which consistent with Mises' regression theorem, they would have to be absolutely interchangeable with actual dollars but more convenient, so that eventually the employment of bitcoins completely surpasses the employment of dollars (in all of its various forms) altogether.
If bitcoins actually become money (again defined as a commonly employed media of exchange) in any other way, then Mises' regression theorem will become empirically invalidated.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
I'm just going to reproduce my earlier response here to keep everything together:
It would appear than not only does the Ithcac HOUR disprove the theorem, but bitcoin itself does. You will likely claim that bitcoin hasn't been around "long enough" to be considered a currency and claim it's "just a fad" or a "bubble" or something, but that is irrelevant (not to mention whatever time frame you choose would be completely arbitrary). The question is whether the object "already possessed an objective exchange-value based on some other use at the moment when its use as money began". This obviously wasn't the case with either of these two examples. So it would seem that despite whatever other claims and qualifiers you might like to make—and I realize I'm probably committing some kind of sacrilege here—Mises has already been proven wrong in this case.
This only proves that mankind is replete with islands of concentrated supidity and ignorance.
From window #1 in the cartoon:"Since we're adding to Ithaca's reliable money supply, more people can trade more, and more trading means more JOBS."
From window #2: "...but Hours remind us that wealth comes from LABOR and everyone deserves fair pay."
Just plaster yourself with labels such as fair, green, grassroots, community, organizing; start a Ponzi scheme; attract participants by offering them free funny money if they start accepting said funny money; and watch the suckers pile in. At the same time, become a professional consultant advising other budding Ponzi schemers in the art of replicating the same locally wherever they are. What a testament to human ingenuity and gullibility.
EDIT: This also disproves Mises' Regression Theorem much less than a $10 McDonalds coupon does. The latter is at least backing its coupons with burgers.
z1235:This only proves that mankind is replete with islands of concentrated supidity and ignorance.
Red herring. The question is does it or does it not disprove Mises regression theorem.
:EDIT:
That would seem that it disproves the theorem much more than the backed coupon.
Does a $10 McDonalds coupon disprove it? Or an Amazon gift card?
z1235:Does a $10 McDonalds coupon disprove it? Or an Amazon gift card?
I wouldn't say so, as those are just money substitutes, which Mises talks about in that very passage from Money and Credit. They are meant to serve as a subsitute, a representation of a real money...like a gold certificate.
And an Hour (pegged at $10 each) is not a substitute?
EDIT: I could have a "No Arbitrage" theorem stating that a $10 bill would/should exchange for TWO $5 bills in the market. If a dozen morons accept SINGLE $5 bills in exchange for a $10 bill, would that disprove my theorem?
z1235:And an Hour (pegged at $10 each) is not a substitute?
Decent point. In all the discussion about the HOUR being a random non-backed currency I didn't really think about the peg. Technically I would suppose a peg would mean it is backed. That makes me wonder why the HOUR gives Dave so much trouble.
Either way, I don't know what the debate is about. The quote is right there. "an object cannot be used as money unless, at the moment when its use as money begins, it already possesses an objective exchange-value based on some other use." Bitcoin has completely refuted this. The only way you could argue that it hasn't is if you do what Dave basically did in the other thread and claim "well, it doesn't count because it's not a real currency, it's a fad. It hasn't been around long enough to be considered a real currency."
No true Scotsman or not, the fact of the matter is Bitcoin has been used as a money and at the moment its use as a money began it DID NOT already possess an objective exchange-value based on some other use. How could it? The main crux of Dave, et .al.'s argument is that it has no other use. So despite how one may want to dance around the definition of what constitutes a currency vs. a "fad" or how one wants to rest on the laurels of "well, uh...those people are just dumb", the fact remains Mises appears to have been proven wrong.
JJ, as I implied with my No Arbitrage Theorem example, there is an inherent problem with all theorems about markets and human behavior. I would think all Mises' theorems would presume economies comprised of rational human actors pursuing their self-interest. How does one fit islands of human stupidity and/or gullibility into such models? Atoms and energy behave narrowly predictably. The attributes of a "rational human agent" lay along a wide distribution with fat tail outliers on either side of the meaty average.
Rationality is beside the point. The point is that people prefer greater satisfaction of their wants over less satisfaction of their wants. Even "stupid" and "irrational" people prefer greater satisfaction of their wants over less satisfaction of their wants. They may poorly calculate how to achieve satisfaction of their wants but that does not alter one iota the fact that - by acting at all - they are always striving towards the satisfaction of wants.
By trading away something of higher market value for something of lesser market value, a person is calculating poorly. He is not necessarily stupid or irrational. He may be calculating poorly because of an exaggerated sentimental attachment to the thing he is exchanging for - as in the case of Ithaca HOURS or Bitcoins. Both Bitcoins and Ithaca HOURS have more in common with subway tokens or casino chips than money per se. Neither are banked. Neither are used in the extension of (white market) credit nor will they ever be short of being adopted by a government. Since they are clearly not money, Bitcoins and Ithaca HOURS cannot possibly disprove the Regression Theorem.
Now, let's say - for the sake of argument - that Bitcoin was actually being used as money - to calculate profits, to store savings, to secure credit, and so on. Would this disprove the Regression Theorem? No, it would not because the RT does not deal with how money is selected to begin with, it deals with the question of why money - particularly fiat money - is valuable. Fiat money - which has no commodity value on its own - is extremely valuable and this is truly puzzling since it is very strange to think that people would give away real goods for unbacked slips of paper, yet they do. Mises' RT answers the question, "How can this be?" It does not say "only gold can be money." It's gold bugs who say the RT says that.
But would it affect Austrian monetary theory at all? I think the answer is yes since we'd have to wonder how it is that a good which is far from being among the most marketable goods has come to be generally accepted in indirect exchange. That is, in order to have become useful in indirect exchange, the good must have first been demanded in direct exchange. So how is it that a good like Bitcoin - which has no demand in direct exchange to speak of - has come to be used in indirect exchange? In this hypothetical scenario, I would look at the fiat money regime and ask how that may be distorting people's perceptions of marketability of monetary goods, either as a result of the success of government propaganda or simply as a result of an unmet demand for a good which governments cannot tax, regulate or audit. I'm throwing the Bitcoin fanatics a free hint on how to make their case stronger, let's see what they do with it.
Clayton -
The value of bitcoin didn't arise out of thin air. The value of bitcoin arose from its exchange with U.S. Dollars. I think that bitcoin, either earlier or still, is a commodity, not a medium of exchange. It is a commodity designed with the intention of becoming a medium of exchange.
Addendum: People seem to be confused on the RT... it does not imply that monetary experimentation is impossible. Monetary experimentation (and participation in monetary experiments) is certainly possible. The point is that you can't simply walk out into the market with slips of paper saying "Ten Clayton-Dollars" and looking like fiat money and say "I have created a new money!" Entrepreneurs could and would experiment with all kinds of money, money forms (coins, bars, etc.) and money substitutes in a free market in currency issue. But it is the market that selects what is to become money and that's the central point of the RT. Even when a government supposedly bootstraps a new currency into existence by decree (fiat), they must submit to the power of the market, that is, they must make the new money exchangeable for the old. Otherwise, no one will ever use the new money and the initiative to launch the new money will fail. If even a government can't do it, a private individual certainly can't do it.
z1235:JJ, as I implied with my No Arbitrage Theorem example, there is an inherent problem with all theorems about markets and human behavior. I would think all Mises' theorems would presume economies comprised of rational human actors pursuing their self-interest. How does one fit islands of human stupidity and/or gullibility into such models? Atoms and energy behave narrowly predictably. The attributes of a "rational human agent" lay along a wide distribution with fat tail outliers on either side of the meaty average.
Then don't state your theorem that way. Milton Friedman made his students aware of sloppy definitions, and I would think Mises was just as aware. There's nothing wrong with being wrong.
Honestly I don't care if it was irrationality that began bitcoin's use as a money, that still doesn't change the fact that it has served that function for over 2 years now, and with a much greater user base that I think anyone would have imagined (especially someone like Dave). (Pretty safe estimate at well over 100k users...which I guarantee if you said "I've got a brand new digital currency that isn't backed by anything and has no value other than its use as a money...I bet I can get over 100,000 people to use it", someone like Dave (and plenty of others, to be fair) would have tried to have you committed.)
I think dvide does an excellent job going into this in his posts in the other thread. It would seem it does take a bout of seeming irrationality to trade something which has an established real-world market value for something that doesn't. But that doesn't mean that same degree of irrationality is needed at every point in the future. As with almost everything innovators and early adopters take a certain level of risk, and in many cases the risk is quite high. But as time goes on, adoption of new technology poses less and less of a risk, and therefore requires less and less of a risk tolerance...which is what leads to more and more people adopting it...much like I was talking about with email and PDF. That's an integral part of the whole technology adoption lifecycle.
And I guarantee you if 300 million Americans started using Bitcoin tomorrow, even someone like Dave would start using it. And he wouldn't have to be "convinced" by anyone. He would do it out of convenience and because of the comfort gained from a low level of perceived risk based on the sheer number of users. Or as he would claim "because it would bring him happiness" as his use of email and PDFs did. And there is nothing I have heard that proves the varying risk tolerance of more and more people will not be met, as more and more people start to try it out and use it...simply because they feel more comfortable now that x number of other people are already using it. Every step of the way some unique user's risk tolerance is met, meaning he gets added to the pool...meaning the perceived risk has gone down...which means a person with a higher risk tolerance is now satisfied. It doesn't happen overnight, but a snowball is a snowball. The closest thing to an argument I've heard is "how are you going to convince all those people". Which of course, isn't an argument at all. (Not to mention is countered by Dave's own admission that he didn't need to be "convinced" by someone else to use new technologies he has adopted.)
And the entire crux of Dave's argument is that that many people will never use bitcoin because he knows it will fail...and he knows it will fail because there is no flaw in his reasoning...his reasoning which is nothing more than "everyone agrees with me and feels the way I do (in that bitcoin will fail) and will act as I do because there is no flaw in my reasoning, and therefore bitcoin will fail, because I think it will fail and everyone thinks like me and they think it will fail, therefore it will fail because there is no flaw in my reasoning that everyone thinks like me and will act as I act because there is no flaw in my reasoning, which is that it will fail. And there are no flaws there. And everyone agrees because of that. And no one ever follows a flawed reasoning."
I have not heard any argument that proves bitcoin would fail. I have not even heard one that proves it couldn't be a success (as defined by being a widely accepted and recognized unit of exchange, like the US dollar.) The best I have heard is that it is like a hot potato and there there is a level of risk involved, in that people could suddenly stop wishing to accept bitcoins. But this is true of anything. The only difference is other things have a much longer track record and are much less likely to have that happen to them. But so what. It's riskier. That is not a proof that it will fail.
I'm still wondering about this whole thing, but I certainly haven't heard a very convincing argument on either side.
I think Bitcoin is currently effectively acting as an unguaranteed money substitute for dollars. By virtue of its anonymity, relative security and distributed nature, demand for Bitcoins can exceed demand for dollars. However, this illustrates just how precarious the position of Bitcoin really is. If Bitcoin were to grow to a multi-billion dollar market cap, this would attract the attention of the Establishment (I'm sure they're already following it) and small regulatory changes could easily gut the value of Bitcoins. This is why I would never hold Bitcoins and why I think that everyone holding Bitcoins is crazy. If you think the Establishment will stand by and watch as a voluntary unbacked money starts to eat into their market share and drives down the value of fiat currencies globally, you got another thing coming. By virtue of being unbacked, Bitcoin is at the mercy of the Establishment because it has nothing but its convertibility into other fiat monies. A backed currency can fluctuate in value only so far as confidence in the issuing institution fluctuates.
If Ye Olde Bank issues Ye Olde Bank banknotes and a rumor starts that they are only backed by 1/10th of face value, a panic could ensue and people would try to draw out their reserves in exchange for the banknotes. But if it turns out the rumor was just a vicious lie and YOB was able to satisfy all reserve withdrawals on demand, then those who did not believe the rumors and continued to hold YOB notes will be unaffected. However, Bitcoins don't have any reserve at all. They have only the backing that all holders of Bitcoins agree that they should have. That is, they only have their market price. If convertibility freezes up (look at the Mt. Gox crash a week ago), that market price can drop to zero in a heart beat because as people refuse to accept Bitcoins any longer (or only at dramatically reduced exchange rates), they are effectively shrinking the "reserves" which are currently giving Bitcoin value.
Clayton:Now, let's say - for the sake of argument - that Bitcoin was actually being used as money - to calculate profits, to store savings, to secure credit, and so on. Would this disprove the Regression Theorem? No, it would not because the RT does not deal with how money is selected to begin with,
"an object cannot be used as money unless, at the moment when its use as money begins, it already possesses an objective exchange-value based on some other use."
It's right there. That's what Mises said. If you're going to concede (even for the sake of argument) that bitcoin is being used as a money then I don't see how you can claim that it doesn't violate what Mises just said.
it deals with the question of why money - particularly fiat money - is valuable. Fiat money - which has no commodity value on its own - is extremely valuable and this is truly puzzling since it is very strange to think that people would give away real goods for unbacked slips of paper, yet they do. Mises' RT answers the question, "How can this be?" It does not say "only gold can be money." It's gold bugs who say the RT says that.
Paper money has value because it is fiat...which means by decree. It is largely valuable because legal tender laws enforce its acceptance. (see this recent thread.) I think you're misunderstanding the application of the theorem here. It is not so much "where does it get its value" as much as how the new money got priced in relation to other goods. His point was that without a prior exchange ratio there would be no way to know how much a unit would/should exchange for.
Clayton:I think Bitcoin is currently effectively acting as an unguaranteed money substitute
AKA "a money".