Bitcoins *prove* Mengerian account of money creation?

Peter Šurda:

The German "imaginären Wert beizulegen", is, in my opinion, best translated as "assign imaginary value".

[...]

Again, in my opinion, the best translation would be "things worthless as such". That's a bit more neutral than "intrinsical", even though "inherent" is probably still acceptable.

The German version sounds like Mises was addressing the idea that people make up value without a rational basis. You might get these subtleties if you're more familiar with the German language.

That's essentially the same translation as I (through Google Translate) gave it. So the question is, to what is the imaginary value assigned? Mises provides the recipient of the imaginary value in his German phrase "an sich wertlosen Dingen" - which, using your translation of "things worthless [or valueless] as such", would mean that Mises is talking about assigning imaginary value to things that are valueless as such. Furthermore, how is this imaginary value assigned? Mises again provides the mechanism in his German phrase "durch eine Fiktion" - which readily translates as "through a fiction". I suppose this could be taken to emphasize the imaginariness of the value being assigned, but there's still the notion of objects that are valueless in themselves being presented. Presumably, given Smiling Dave's exposition of the context, Mises used the German phrase "an sich" to refer to pre-existing value in one or more non-monetary uses.

Peter Šurda:

It's merely a counterexample to show that even if you choose to disagree with me on the translation and interpretation, it still fails to address the situation we're dealing with.

So, like I said, it's irrelevant to my refutation of one of your claims. It may be relevant to the bigger picture, but that's not what I was talking about.

Peter Šurda:

... if under barter (according to my interpretation). My interpretation is further supported by people claiming that the regression theorem explains money substitutes and fiat money, even though they are not commodities.

Just to make sure, you're (implicitly) defining "commodity" here as "something to which has been imputed value for a non-monetary use or set thereof"? If so, then money substitutes and fiat money per se are not commodities, because they're considered to have only monetary uses. However, money substitutes are not money per se, and fiat money has its origins in commodity money. At no point is an entirely new monetary system constructed out of whole cloth. While services also fall under the above definition of "commodity", money as a service would seem to mean that money is debt until the service is actually performed.

Peter Šurda:

I am not claiming that Bitcoin is a money substitute, only that it is somewhat similar to it, because it can "piggyback" on preexisting monetary system through exchanges, which act as forex. Bitcoin is a service in a similar way that banking, paypal and western union are a service. Banks, paypal and western union would not exist without money. They exist because compared to money proper, they decrease transaction costs of payment transactions. Bitcoin does the same thing, with the exception that if you accept them as a store of value in addition to a medium of exchange, compared to fiat/gold, you get rid of money substitutes (or, forex from the point of view of Bitcoin). It's the equivalent of gold being able to teleport between vaults, at negligible time and cost. Bitcoin has plenty of other cool features, but if it did not decrease transaction costs, it would have no chance, similarly as if banks issued clay tablets instead of paper bank notes, they would not be able to compete with money proper either.

Banking, PayPal, and Western Union are services, yes. But they themselves are not money - not even under the fiat-currency regimes that we "enjoy" today. So treating Bitcoin as a service that is also money is fundamentally different from banking, PayPal, and Western Union. The question I have now is, which is it? Is Bitcoin money? Is it a service? Or are there actually two parts to Bitcoin, a money part and a service part? If the last option is indeed the case, then we can ignore the service part of Bitcoin and focus entirely on the money part.

Since you asked so nicely, sure.

There are several kinds of value.

1. First, the value a thing has to an individual, meaning how badly he wants it. This is called subjective value, which, as you so rightly point out, some people have for bitcoins.

2. Then there is something Autolykos described very nicely as ""value that inheres in an object". It has sometimes been called "intrinsic value", and Austrians think it is as mythical as phlogiston, meaning there is no such thing.

3. There is a concept which Mises called "objective exchange value", and several Austrians have called "intrinsic value" over the years. Mises has also called it "industrial use value". This is not the same as the previous  meaning of "intrinsic value'. Rather it means, and again we are indebted to Autolykos, "value that people impute to an object for non-exchange uses".

4. There is a final meaning of value, mainly "the value I have in possesing this because I want to spend it and get stuff for it".

To lay it all out so all can follow, let's go back to the first meaning of value for a sec, the personal subjective value a person might have for an object, how badly he wants it. To understand the regression theorem, Mises pointed out that we will have to analyze WHY this person wants that thing. For our purposes, we can group all the whys into two categories.

First, he may want it to use it in his house, like to eat or drink or stare at on cold winter evenings. The main thing is, he wants to hang on to the thing for some reason, because he has some use for it. That is the first category of Why he wants it, and that's exactly what we meant by "intrinsic value" in 3 above. 

Also he may have subjective value for it, meaning he may want it, not to keep and use, but rather to use as money to buy something else. Note that this is 4 above.

So those who like to draw charts and graphs would draw a box and label it "1. Subjective value". In that box he would put two little boxes, one labelled "3. Intrinsic value as the phrase is used by Smiling Dave and others" and the other "4. Value because [maybe] it can be passed on to the next guy, the only value bitcoin has."

The regression theorem says that a thing will only ever be money if it is in box number 3 for a very large group of people, [at least to start with], but not if it is ONLY in box number 4.

 

Autolykos:

So the question is, to what is the imaginary value assigned? Mises provides the recipient of the imaginary value in his German phrase "an sich wertlosen Dingen" - which, using your translation of "things worthless [or valueless] as such", would mean that Mises is talking about assigning imaginary value to things that are valueless as such. Furthermore, how is this imaginary value assigned? Mises again provides the mechanism in his German phrase "durch eine Fiktion" - which readily translates as "through a fiction". I suppose this could be taken to emphasize the imaginariness of the value being assigned, but there's still the notion of objects that are valueless in themselves being presented. Presumably, given Smiling Dave's exposition of the context, Mises used the German phrase "an sich" to refer to pre-existing value in one or more non-monetary uses.

This is more a linguistic issue than a terminological. How Smiling Dave presents it it appears to be more like "You tell me (Smiling Dave) that this has value, so from my perspective, it should have, even though I don't value it at all", whereas the German version is more like "It's not sufficient that people declare it has value, they need to act upon it as well". In other words, Smiling Dave interprets "intrinsic value" as value for him, rather than the person performing relevant actions.

Autolykos:

So, like I said, it's irrelevant to my refutation of one of your claims. It may be relevant to the bigger picture, but that's not what I was talking about.

This part, yes.

Autolykos:

Just to make sure, you're (implicitly) defining "commodity" here as "something to which has been imputed value for a non-monetary use or set thereof"?

I'm not defining "commodity", rather "commodity under barter". My whole point is that the situation under barter is different than the situation under a monetary system.

Autolykos:

If so, then money substitutes and fiat money per se are not commodities, because they're considered to have only monetary uses.

Yes.

Autolykos:

However, money substitutes are not money per se, and fiat money has its origins in commodity money. At no point is an entirely new monetary system constructed out of whole cloth.

Historically, it might be true that some money substitutes weren't money, but legal titles to money. But that's not always the case. There just needs to be some sort of a link between them.

Autolykos:

While services also fall under the above definition of "commodity", money as a service would seem to mean that money is debt until the service is actually performed.

Money substitutes require a legal relationship between the issuer and the people using it. That does not necessarily mean debt.

Autolykos:

Banking, PayPal, and Western Union are services, yes. But they themselves are not money - not even under the fiat-currency regimes that we "enjoy" today. So treating Bitcoin as a service that is also money is fundamentally different from banking, PayPal, and Western Union. The question I have now is, which is it? Is Bitcoin money? Is it a service? Or are there actually two parts to Bitcoin, a money part and a service part? If the last option is indeed the case, then we can ignore the service part of Bitcoin and focus entirely on the money part.

First of all, I'm not claiming that Bitcoin is money. Merely that the regression theorem does not preclude it from becoming money.

There is a certain link between "money" and services built upon them. It's not a 100% link: for example, the substitute issuer may go bankrupt, might limit redemption or freeze your account if they don't like what you're doing, charge you fees and so on. Furthermore, there's fractional reserve banking. And under fiat money, which stretches the link even further, there's no redemption at all: the central bank won't give you their reserves. The legal link evaporates, only the historical link remains.

The whole issue becomes more clear if you view the Mengerian/Misesian approach from another perspective: that they weren't talking about a specific money, but money as such. They were talking how a monetary system and the concept of price arises out of barter. Once we have a monetary system and prices, the points they were addressing become superfluous.

Smiling Dave

Smiling Dave:

3. There is a concept which Mises called "objective exchange value", and several Austrians have called "intrinsic value" over the years. Mises has also called it "industrial use value". This is not the same as the previous  meaning of "intrinsic value'. Rather it means, and again we are indebted to Autolykos, "value that people impute to an object for non-exchange uses".

This "objective exchange value" Mises used refers to the formation of price under barter.Outside of this context, which is what you are presenting, it has no meaning.

Smiling Dave:

4. There is a final meaning of value, mainly "the value I have in possesing this because I want to spend it and get stuff for it".

Let's accept this for arguments' sake.

Smiling Dave:

To lay it all out so all can follow, let's go back to the first meaning of value for a sec, the personal subjective value a person might have for an object, how badly he wants it. To understand the regression theorem, Mises pointed out that we will have to analyze WHY this person wants that thing. For our purposes, we can group all the whys into two categories.

Mises was explaining how barter evolves into a monetary economy. He was not explaining what how people value things in general. So there's no need to address the rest the reof your posts, since it's irrelevant.

Smiling Dave:

The regression theorem says that a thing will only ever be money if it is in box number 3 for a very large group of people, [at least to start with], but not if it is ONLY in box number 4.

This is wrong, and the the very fact that according to various followers of Mises, he used the regression theorem to explain money substitutes and fiat money refutes this. And, since I already pointed this out several times, and you always ignore it, that just works even more to your detriment.

Your error becomes more apparent if you realise that it has no reference to in any other Austrian writings. Nowhere does it say that the act of payment is a new type of action that is subject to different praxeological rules than other actions. You're essentially saying that "Bitcoin exists, and it can become anything, but it can't become money". That makes not sense whatsoever. The point of the regression theorem is not that some things can't become money, but that these things can't become anything.

Mises was explaining how barter evolves into a monetary economy.

No. You don't need a regression theorem for that.

He was explaining how a particular type of money, say gold, got to have its type 4 value today. His conclusion is that it must have had some type 3 value in the past, and was used as a medium of exchange based on its type 3 value. From that use, it began developing type 4 value as well. As a corrolary, he states explicitly [as I quoted above, in the line to which I inserted the phrase "like those stupid bitcoins"], that no money can ever get off the ground if it attempts to start with a type 4 value only. Which describes bitcoin to the ground.

He was not explaining what how people value things in general.

How little you understand if you write something like that.

As for fiat money and money substitutes, indeed he expalined them too. He explained them by saying that they have type 4 value today because at some time in the past they were redeemable by law for something that had type 3 value. Which of course is not the case with bitcoin. Nobody is now, or ever was, legally obligated to give you anything for a bitcoin, as opposed to fiat and money substitutes.

As for your last paragraph, it is gibberish to me. Maybe someone else can help you out.

Smiling Dave:

No. You don't need a regression theorem for that.

Actually, you do, and that's the actual purpose of the regression theorem. Not your imagainary puropse that has no foundation in the Austrian school.

Smiling Dave:

How little you understand if you write something like that.

Psychologists call what you do "projection". It's ascribing one's own feelings and attitudes to other people.

Smiling Dave:

He explained them by saying that they have type 4 value today because at some time in the past they were redeemable by law for something that had type 3 value.

However, this contradicts with your presentation of the regression theorem. This is my point, you fail to provide a coherent interpretation of the regression theorem. You make a claim, but then arbitrarily add random exceptions, and are oblivious to this discrepancy.

Smiling Dave:

As for your last paragraph, it is gibberish to me. Maybe someone else can help you out.

Maybe you can explain what particularly you don't understand?

American or British? :)

Bitcoin was built from older, proven technologies. What's special is the way those technologies have been put together. The general underlying structure is a system of management that works through a communication protocol. That system can be applied to far more than just finance. In fact, it could replace a lot of politicians, lawyers and business administrators in a way similar to how industrial robotics has made specialized assembly-line workers less necessary.

It's undeniable that there is wealth stored and available within the Bitcoin system, so shouldn't existing definitions of money be reassessed instead of refuting what obviously exists? Bitcoin just happens to be well-suited to acting as a form of money whether it can be defined as a tangible commodity or not.

It seems to me that denial of Bitcoin as a form of money is because the system itself (and the ideas it was built on, which weren't commodities either) is as abstract as the concept of money.

Ramon:

It seems to me that denial of Bitcoin as a form of money is because the system itself (and the ideas it was built on, which weren't commodities either) is as abstract as the concept of money.

Indeed. There are various people who deny reality because it does not fit into their dogmas. This is not particular to money even, you can find them all around.

...there is wealth stored and available within the Bitcoin system,...

TY Ramon, for translating into what I can understand. But I still have a problem. What do you mean by there is wealth stored and available?

What do you mean by wealth? And what do you mean by stored? To me wealth stored is like the gold in Fort Knox. Gold is the physical wealth, and it is physyically present in Fort Knox, thus stored there.

1. What exactly is the wealth stored in bitcoins? Please give me a shopping list of some kind so I can understand what you mean.

2. And of course, how is it stored there? Is it physically present in the bitcoin?

Peter Šurda:

Indeed. There are various people who deny reality because it does not fit into their dogmas. This is not particular to money even, you can find them all around.

Yes, resistance to the unknown is universal; deeper understanding generally helps to get past that.

Smiling Dave:

TY Ramon, for translating into what I can understand. But I still have a problem. What do you mean by there is wealth stored and available?

What do you mean by wealth? And what do you mean by stored? To me wealth stored is like the gold in Fort Knox. Gold is the physical wealth, and it is physyically present in Fort Knox, thus stored there.

1. What exactly is the wealth stored in bitcoins? Please give me a shopping list of some kind so I can understand what you mean.

2. And of course, how is it stored there? Is it physically present in the bitcoin?

My pleasure, and excellent questions. I'll answer as best I can from my understanding. It'll be a lengthy reply because I don't know how much about Bitcoin you're familiar with.

The concept of wealth is as you describe (as far as I can tell) - stored work value, in this case represented by gold. Since it is a physical object, it is stored physically.

Wealth is stored in the Bitcoin system essentially the same way. Instead of a gold bar, a cryptographic key represents the wealth. Rather than the kind of physical storage we think of with gold, Bitcoin keys are stored in files on any digital medium (hard disk, flash drive, CD, etc). It's still similar to gold - some iron filaments in a hard disk represent the stored work value or wealth.

Gold's effectiveness at storing wealth/value is because of its physical properties and high stock-to-flow ratio; its consumable quantity is low compared to the total amount in existence, preventing valuation from fluctuating excessively. Bitcoin will achieve the same status and even exceed gold eventually, as can be seen in this Bitcoin & gold stock-to-flow chart (at bottom of page).

This similarity is probably why it's easy to see how Bitcoin works, but not what Bitcoin actually is (or how powerful it is). If you're familiar with Hawala-style credit systems (also foreign to traditional economic conceptions), or even accounting ledgers, it's easier to get a handle on how Bitcoin is structured.

In Ft. Knox, gold is stored physically. However, it's rarely used directly - the accounting books show the audited amount and history thereof. This is kind of like how the CME operates, with the exception that deliveries of physical metal can and do occur much more frequently. At the CME, most of the time it is the paper contracts that change hands and represent the gold, which in turn represents accumulated wealth (work effort) throughout the ages.

Now imagine every participant in the economy has a copy of the CME's (or Ft. Knox') books. Every entry would have to be recorded in every copy anytime anything were changed. That would be logistically impractical and even basic transactions would take an impossibly long time while all copies were being updated. For this reason, these ledgers remain under management and control of a central entity (USGov, CME Group, etc).

What Bitcoin does is essentially combine the gold with the ledger (for a different analogy, it's like DNA combining blueprints with instructions for their use). It wouldn't be possible without the technologies Bitcoin incorporates (cryptography, triple-entry accounting, Merkle trees, etc) and the near-instantaneous communication offered by the Internet. All participants in the Bitcoin network have access to this ledger. They also have control over it in proportion to the size of the entire Bitcoin system (1 node out of 1 thousand will have 1 thousandth of the 'voting power').

Let's come back to the wealth aspect. Each key recorded in the Bitcoin ledger can have an arbitrary value attached to it, up to the limit of the owner's cumulative amount. If I have 10 Bitcoins total and I want to perform a transaction for 6 Bitcoins, I will send one new key worth 6 and my current key will now be worth 4 instead of 10. This is all recorded in the Bitcoin ledger.

If the Bitcoin economy were large enough, it would be possible for new wealth to form the basis of that stored in the system exclusively. Since there's a chicken & egg problem (it's like airline reward points), the incentive isn't universal (yet - it would likely take ~10% of a population to adopt Bitcoin for it to hit its tipping point). With that being the case, most of the wealth in the Bitcoin system has been transferred from other sources like the Euro and US dollar. It is therefore easy to equate to the forex environment; if I exchange dollars for Euros, am I actually transferring wealth, representations of wealth, changing ledger entries... ?

The only real difference between a Bitcoin transaction and a traditional forex transaction is the control & management. With the latter, it's a government or a bank or other private business. With Bitcoin, the network itself takes the place of the central authority. If a central authority compromises or loses its ledger, there's a clear point of failure. Bitcoin's ledger is distributed so widely that it's virtually impossible to dominate or lose it. Therefore, as long as the network exists, the record of your transactions (and thus your wealth) exists.

Your wealth stored in the Bitcoin system is readily available for conversion into other forms of money. There are multiple exchanges which can provide you with Euros or US dollars or any number of other fiat currencies. Several firms offer gold and silver for Bitcoins. Finally, should the Bitcoin economy grow large enough, it will be possible to engage in direct transactions without another form of intermediary.

One intriguing aspect of Bitcoin is that it partially alleviates the Triffin dilemma by allowing decimal expansion. The USD can be expanded to 2 decimals from the base unit - a dollar and then .01 or up to 100 subdivisions. Bitcoin can currently go to 8 decimals - .00000001 and it is possible to get the network to operate with further expansion if enough participants agree to it. The problem with this solution is that there is a major price reset approximately every 20 years, assuming a steady level of participation. That's not ideal, but still far better than a hard limit. Without the limitation of 21mm total units, Bitcoin would work exactly the same as existing fiat currencies and be able to expand freely with the economy's demand for money, the only difference again being the network's self-management.

Other limitations exist - e.g. as noted, Bitcoin is not a physical object and requires existence of the Internet (or similar network) for its own existence. A major potential threat is a massive X-class solar flare that could damage or wipe out enough electronics to cause loss of the Bitcoin ledger (actual term is the 'blockchain'). That's still very unlikely, as every single copy would have to be destroyed simultaneously.

This is one reason why I expect Bitcoin and gold to function in an overlapping and complementary fashion. The same complementary interaction seems likely with digital Hawala networks like Ripple providing credit for economic expansion (also only possible on a large scale via the Internet) and a digital Bitcoin-like inflationary currency for price stability. Meanwhile, Bitcoin and gold and certain other asset classes should remain the core stores of value which will continue to grow in value due to amplified wealth generation being crammed into them. The interfacing infrastructure is already developing rapidly as well, in a platform called Open Transactions.

There will still be banks in the traditional sense, but the era of banking and finance as we know it is dying.

Something really interesting is recent use of deterministic algorithms being to recreate your keys (software already exists, one project being Electrum). It's like solving for:

A + X = 37

Where A is my passcode, say 22 for argument sake. The key can then be rebuilt by performing simple algebraic operations, resulting in 15 (the key). The actual implementation utilizes much more complex algorithms and only requires the passcode, but the principle is the same.

In this manner, there really is no physical storage at all until the key owner wishes to make use of it. The owner could store all of his wealth in the Bitcoin system as a memorized mnemonic, a QR code or even inscribed on a gold coin like serial numbers of paper currency (technically these would still require neurons or paper or gold for physical storage, and digital information could be viewed as a commodity of sorts).

This went well beyond just the availability & storage of wealth in Bitcoin, so I hope it wasn't too much. If you have any questions or disagreements, I'd be glad to explore different paths. The world is dynamic, after all.

 

TY Ramon for your reply. Sadly, it only reinforces my contempt for bitcoin.

Here's how I see it. The big mistake is in this line right here:

The concept of wealth is as you describe (as far as I can tell) - stored work value,

Nope, that is not wealth at all. Wealth is anything physical that people want and use and is scarce. People have no use for the iron filings inside the computer that are arranged in a bitcoin configuration. They cannot eat it or drink it or use it for jewelry, They cannot do anything with it but pass it on to the next guy. So by my lights bitcoin is not a store of wealth.

Also, Pete will be the first to tell you that your definition of wealth is totally in disagreement with Austrian Economics, although some Marxists might agree with you. You seem to be telling me the Labor Theory of Value [wealth=stored work value], which AE has debunked to my satisfaction.

This initial error leads to others as your post goes on, which I'm sure are easy to detect to those interested.

Smiling Dave:

Also, Pete will be the first to tell you that your definition of wealth is totally in disagreement with Austrian Economics, although some Marxists might agree with you. You seem to be telling me the Labor Theory of Value [wealth=stored work value], which AE has debunked to my satisfaction.

I would tell you that wealth (=value) is subjective and that you ignore the possibility that services, rather than goods, have value. But I would be just repeating myself.

Smiling Dave:

Wealth is anything physical that people want and use and is scarce. People have no use for the iron filings inside the computer that are arranged in a bitcoin configuration. They cannot eat it or drink it or use it for jewelry, They cannot do anything with it but pass it on to the next guy. So by my lights bitcoin is not a store of wealth.

Which people have no use for the iron filings, the end-user who may not be aware of them and their function, or those at the company which makes use of those iron filings to manufacture the computer for end-users? Does a person's want for electronic devices translate into a want for iron filings? How did filaments of a common metal come to be used in advanced technology as it is now? Do the requirements of sustaining life even apply for such an item to have value?

Gold cannot be eaten or drunk, and jewelry is an arbitrary assessment point - not everyone chooses to wear jewelry, and those who do may not use the same materials. I can't do anything with gold but pass it on to someone else, lest it simply sit in my possession - I don't have metalworking skills with which to repurpose gold, so subjectively it is useless to me without consideration of its monetary aspects. Yet the monetary aspects are still there for me regardless of my understanding about gold or any other purposes for the metal. Why?

We economic types can be pretty obstinate, but that can be a good thing. I'll be the first to admit that my knowledge is not as expansive as many others; I'll just say that I've thought about situations on my own quite extensively and have arrived at many of the same conclusions as are present in Austrian theories. I'm also open to any additional material that might offer another way of looking at an issue. I do tend to ask more questions of what I'm given than just accept anything with finality, though.

To an extent, I am talking about LTV - not in a Marxist sense, but from Adam Smith's perspective that it really applies only in the earliest stages of development. Bitcoin certainly qualifies as being in early stages.

Recently, Bitcoin has shown signs of shifting toward being dominated by Subjective Theory of Value paradigms. Patterns that would fit marginal utility also can be seen. However, none of these concepts seem to fully encompass what is happening with Bitcoin, I think because of the 'phase transition' taking place.

It can't be pinned down, so everything is being thrown at it in an attempt to understand how to appropriately value each unit - production cost, subjective benefit, scarcity and usage, etc.

Here's a question for you, and if you have further information I'd be glad to read more: Can wealth be removed from gold? Is it possible to make 1oz of gold worth less than 1oz of gold? If so, how? If not, why?

Peter Šurda:

I would tell you that wealth (=value) is subjective...

I'm curious, at what level is subjectivity assessed?

Ramon,

I've done this topic to death. You are welcome to to do a search on my blog for "bitcoin" and all will become clear. Don't forget to read the comments as well. Feel free to re-ask what you wish after you have seen the articles on the blog.

I understand, which is why the majority of my reply was not specificially about Bitcoin. Time is at a premium, so I can also see why you may have missed the last paragraph.

"Can wealth be removed from gold? Is it possible to make 1oz of gold worth less than 1oz of gold? If so, how? If not, why?"

If you can answer this or point the direction to where it is, I'd be most appreciative.

As for reading your blog, I did. The comments as well. You're absolutely right, in the traditional sense. Mises and Rothbard and all the others are also right in a traditional sense. Bitcoin is like a new form of matter, figuratively. Bitcoin is not traditional. Nor is Bittorrent or even the human mind. This may be the 'quantum moment' for the field of economics. Bitcoin in a monetary application doesn't make Austrian theories wrong: it simply transcends them; they no longer apply properly.

There have been numerous attempts at a digital currency and I would agree with you on all of them, but none had the right formula until 2009. Bitcoin as a general system is applicable to much more than just money. Exploring the source code would help, if you're technically inclined. If not, it's like missing out on a most elegant and beautiful equation (think E=MC^2). In order to truly understand it without a computer science background, you'll have to read up on neurophysiology, cryptography, triple-entry accounting and decentralized networking.

Until you do, you'll be wondering why Bitcoin continues to exist and grow when, according to you, it shouldn't. Ask yourself this: if Bitcoin is not money, what is it?

"Can wealth be removed from gold?

Gold will always retain some intrinsic value. There will always be someone out there who can use it, and will therefore want it, want it for something or other. So the possesor of gold has wealth, no getting around it.

If you are asking, can the market price of gold go up and down, sure it can. Might it ever be close to zero, because most of humanity loses interest in it? Theoretically, it's possible.

Is it possible to make 1oz of gold worth less than 1oz of gold?

Not by the accepted laws of logic and mathematics. The equation Worth of one ounce of gold = Worth of one ounce of gold is always true. It is but one instance of the universal law. For all A, A=A. There are no exceptions.

Maybe you are asking can it be worth less today than it was yesterday? Of course, and it happens all the time, if by worth we mean the price on the market.

As for your claim that bitcoin "merely transcends" Austrian theory, you will have to show me why. To me, it is the same as saying bitcoin transcends the laws of physics, or of logic. To put it bluntly, it is a nonsensical statement.

I'll be glad to have you elaborate, by laying out why Mises has proven bitcoin is doomed [so I know we are all on the same page, as is the accepted procedure in scholarly debate], then showing me exactly how and why bitcoins trancendence and elegance and beauty makes it immune to Austrian economics.

BTW, there are plenty of computer scientists on this forum. I have yet to see one of them stand in awe of bitcoin as you do. Quite the contrary.

As for wondering why bitcoins continues to exist and grow, I have already given my take on that in the blog. Not enough time has passed. Beany babies needed ten years.

 

Smiling Dave:

Gold will always retain some intrinsic value.

The concept of intrinsic value contradicts the Austrian school. Furthermore, it is also not true in the broader sense that there will always be demand for gold. It's merely unlikely that the demand will ever go to zero. But it's an empirical datum, not an aprioristic claim.

Smiling Dave:

There will always be someone out there who can use it, and will therefore want it, want it for something or other. So the possesor of gold has wealth, no getting around it.

We cannot apriori exclude the possibility that gold will become useless, it merely appears unlikely.

Smiling Dave:

If you are asking, can the market price of gold go up and down, sure it can. Might it ever be close to zero, because most of humanity loses interest in it? Theoretically, it's possible.

You seem to admit at least that the issue is empirical.

Smiling Dave:

Not by the accepted laws of logic and mathematics. The equation Worth of one ounce of gold = Worth of one ounce of gold is always true. It is but one instance of the universal law. For all A, A=A. There are no exceptions.

I tend to agree, but in the broader perspective, government intereference can disturb this process of evaluation, for example by debasing or fixed exchange ratios (Gresham's law).

Smiling Dave:

As for your claim that bitcoin "merely transcends" Austrian theory, you will have to show me why. To me, it is the same as saying bitcoin transcends the laws of physics, or of logic. To put it bluntly, it is a nonsensical statement.

Since you have not shown any sort of mastery of either physics or logic, your counter is not very persuasive.

Smiling Dave:

I'll be glad to have you elaborate, by laying out why Mises has proven bitcoin is doomed [so I know we are all on the same page, as is the accepted procedure in scholarly debate], then showing me exactly how and why bitcoins trancendence and elegance and beauty makes it immune to Austrian economics.

The purpose of the regression theorem is to explain the emergence of demand and price. It cannot be used to retroactively "disprove" something which already  happened. Your claim is methodologically absurd. Furthermore, counterexamples, such as the aforementioned PayPal or Western Union, underscore the absurdity, because if your interpretation was correct, they would not exist either.

Smiling Dave:

BTW, there are plenty of computer scientists on this forum. I have yet to see one of them stand in awe of bitcoin as you do. Quite the contrary.

Actually, what happens is that a few obsessed guys present their imagination wrapped into a foil of immunity against logic.

Smiling Dave:

As for wondering why bitcoins continues to exist and grow, I have already given my take on that in the blog. Not enough time has passed. Beany babies needed ten years.

I am wondering if you were rambling the same way about Paypal ten years ago.

And just to demonstrate the whole background and motivation, I never said that Bitcoin will not fail, or that the price will not fall or anything like that. Rather I addressed specific points of your (and other people's) claims, which, in most cases, are ignored.

I haven't been able to flesh out a full reply yet. My main stance is still that certain definitions the regression theorem makes use of need to be appended or modified to account for abstract intangibles that can affect the physical. The heart of Bitcoin is the protocol, or social contract of sorts for machines; it isn't based directly on human interaction, which is a distinguishing feature that seems completely outside the realm of AE.

The main purpose for this reply is that Jon Matonis has made some explanation regarding Bitcoin and the regression theorem.

Ramon:

My main stance is still that certain definitions the regression theorem makes use of need to be appended or modified to account for abstract intangibles that can affect the physical.

Coincidentally, I came to the same conclusion. Mises divides goods into production goods, consumption goods and media of exchange. That's incomplete, because there are plenty of other goods which are none of these. I thought long about how to label them and decided that "information goods" is the best description. This would make money a subset of information goods. Other examples of such information goods are positional goods, immaterial goods (such as books) or instruction manuals.

Just like he took money to be a separate category of goods, he took "objective exchange-value" a separate category of utility. But again this is incomplete: it's just a specific example of the network effect: you value goods because other people want or have them.

Another example: in TOMC he mentioned that money is unique because its location does not matter, whereas with all the other goods, it does. But that's not exclusive for money: webservers, for example, have the same feature. Just like it does not matter where your gold is stored as long as you have a bank note, for example, it also does not matter where the webserver is, as long as you know the URL.

Rather than criticising Mises, I will turn this the other way around and praise him as the first person to describe the network effect.

Ramon:

The main purpose for this reply is that Jon Matonis has made some explanation regarding Bitcoin and the regression theorem.

I have issues with Matonis' argument for the same reason as I do with Mises: he took an example and presents it as a general rule. The "unconfiscability" of Bitcoin is merely an example of a more general rule: a decrease of transaction costs. Since it is cheaper to protect Bitcoins against confiscation than gold, this means the use of Bitcoin has, ceteris paribus, lower transaction costs. But this is merely one of the ways Bitcoin decrease transaction costs.

Smiling Dave,

I just want to point out I have not forgotten where we left off:

http://mises.org/Community/forums/t/24195.aspx?PageIndex=6

The discussion here is about those questions. Mises claims to have deduced from self evident axioms and impeccable logical deduction that people will only believe a thing to be money [other than a few fools here and there, who will believe anything] if it has direct use. I invite you to summarize his line of reasoning and show where it is flawed.

1.  You keep wanting to bring the conversation back to the same issue.  I fail to understand your point.  I elaborated in my own words leveraging Rothbard.  I described Bitcoin as a "intermediary indirect medium of exchange."  What is there to further disucss about direct use?  Is there something in dispute on whether Bitcoin fits an Austrian definition of money?

2.  I suggested an "intermediary indirect medium of exchange" is a coerced market phenomenon and suggested you should yield to it.  I can't recall your exact response and I don't feel like scrolling up but you did object to yielding to coerced market phenomenon's.

3.  I asserted whether or not bitcoin is money, is irrelevant to the usefullness of Bitcoin.  This is because individuals are forced to pay taxes in private credit and the state is over taxing or over regulating goods.  Bitcoin has a distinct usefullness in a coerced market of fiat money.

If you can acknowledge Bitcoin has some usefullness in a coerced market I can exit the conversation in agreement.  If you are unable to make an acknowledgement I am going to continue to insist on an explanation other than constantly bringing up a well settled point of what is the Austrian definition of money....

Live free:

We can exit the conversation because I fail to get what you are talking about. Whether this because I'm missing something or because your message is flawed, I just don't get it. In either case, I see no point in continuing. Good luck to you.

I still object to condeming coerced market phenomenons that do not benefit State, Inc. on the basis they do not fit an Austrian definition of money in a free market when there is presently no free market.

Sorry, Live Free, I wrote along reply, but forgot to save it.

Bottom line is that what little limited usefulnes bitcoin has right now is economically insignificant. The regression theorem claims that this is no accident, but inherent in the very nature of bitcoin, and thus bitcoin is doomed to never be more than an insignificant dustmote in the grand ballroom of the Universe. 

Smiling Dave,

you have yet to explain in a coherent manner how your argument logically fits together.

I've found Smiling Dave's posts to be quite good overall.  I can't say the same for you.

There is a difference between "good" and "logically correct".

Considering the context, I would expect one would understand that "good" meant "logically fits together".  I can see why you have trouble understanding posts.

Bottom line is that what little limited usefulnes bitcoin has right now is economically insignificant.

I happen to consider anything that does not benefit State, Inc. signifigant and any effort offering alternatives to State, Inc. an ally.

The regression theorem claims that this is no accident, but inherent in the very nature of bitcoin, and thus bitcoin is doomed to never be more than an insignificant dustmote in the grand ballroom of the Universe.

This statement is premised on the existence of a free market system or the emergence of a free market system.  I do not consider the latter iminent.  Unless of course the regression theorom also applies to coerced markets?

I do not see what is wrong with Austrians embracing bitcoin.  I thought libertarians supported building coalitions. To me, it seems like this would be an easy coalition to build, albeit it is apparently much more difficult if bitcoin insists it fits an Austrian free market definition of money.  It seems everytime someone on behalf of bitcoin asserts it is money there are plenty of Austrians to weigh in and condem bitcoin.

To me the whole "is bitcoin money" conversation is a distraction to opposing State, Inc.

In any event you acknowledged bitcoin presently has

limited usefulnes

I have no further objection.

Ok then, can you show me an example of something Smiling Dave wrote that logically fits together?

I'm sure if you were to pick any 10 of his posts, 9 of them would be sufficient for our purposes.

Any particular reason why you're not more specific?

I remember a post I made a while ago that you refused to respond to.  I'm just returning the favor.

gotlucky:

I remember a post I made a while ago that you refused to respond to.  I'm just returning the favor.

This does not sound like me. Care to provide a reference?

I don't really feel like going and looking for it.  It's buried in one of the bitcoin threads somewhere.  I don't want to wade through all the bullshit.

Ramon,

Thanks for mentioning. I have been absent from Forum for a while, mainly because it's not easy to find the appropriate Mises thread.

Peter Šurda:

I have issues with Matonis' argument for the same reason as I do with Mises: he took an example and presents it as a general rule. The "unconfiscability" of Bitcoin is merely an example of a more general rule: a decrease of transaction costs. Since it is cheaper to protect Bitcoins against confiscation than gold, this means the use of Bitcoin has, ceteris paribus, lower transaction costs. But this is merely one of the ways Bitcoin decrease transaction costs.

I certainly feel comfortable being in the company of Mises. The particular attribute of a cryptocurrency like bitcoin is more than simply 'a decrease of transaction costs'. The "Binary Corollary" addresses a circumstance, or precondition, for the applicability of a general theorem. This is more akin to the 'if statement' contained in Gresham's Law, which states that bad money drives out good (if the exchange rate is set by law). Of course, without the legally-imposed exchange rate, we all know that good money will drive out the bad.

And, so it is with the Mises Regression Theorem which holds only "if the State doesn't restrict currency competition". Because, in a State setting where the rules and the playing field are determined by the monopoly currency provider, there exists an incentive for the monopoly issuer to extinguish or prohibit free-market challenges to its superiority. Currencies that would normally evolve with 'original use' and able to satisfy the Regression Theorem are rendered useless and this effect is amplified in the transition to a digital monetary unit which the 20th-Century Austrians could not have reasonably anticipated.

The cryptocurrency bitcoin is a unique reaction to the confiscation and arbitrary enforcement against 'original use' e-Gold and to the unfortunate centralization of digital bearer instruments such as digicash. If those two examples would have thrived and imbued digital cash with the anonymity and untraceability attributes of paper cash, a bitcoin would not have been necessary. However, bitcoin is necessary precisely to 'route around' the interference caused by the State that has disrupted the natural order of the free-market Regression Theorem. Money is a mass illusion to begin with...a mass faith in something. If humans can mutually value a digital item through 'crowd recognition' or 'swarming', then we have made a great leap because we have restored the power to define what we value in the digital sphere.

Bitcoin is 'digital gold' and gold is 'analog bitcoin'.

Hello John,

I was worried about "talking behind your back" but it looks like you're reading this thread too so I'm relieved.

We started discussing this some time ago but I didn't follow up on that because I didn't think it was important. But for the purpose of a full argument I will amend that now.

I should maybe clarify that by transaction costs, I do not only mean transaction fees. The latter is merely a subset of the former. The transaction costs include all the costs associated with a transaction that are not the immediate part of the transaction. For example, if you want to pay with cash, you need to carry the corresponding amount of cash with you to the place of transaction. This necessity to carry cash is a transaction cost associated with paying in cash. If you need to spend effort on hiding your money from the government in order to pay with that money in the future, this is also a type of transaction cost.

As I argued elsewhere, the ability of Bitcoin to resist manipulation and confiscation by state is a quantitative, not a qualitative, feature. Of course that's not to deny it exist, I also laid out several examples myself where this advantage is obvious. My favourite ones are a dead man switch (gold cannot teleport automatically when you're imprisoned), "cheap horcruxes for everyone" (you can't copy gold), and split-key signatures (you can't split gold along a metaphysical boundary).

So, I agree that Bitcoin has an advantage in this respect, and other currencies or gold don't. But that does not warrant a modification of the regression theorem, neither is a qualitative feature. The purpose of the regression theorem is to explain the formation of price of a medium of exchange (i.e. what Mises calls "objective exchange-value"). How exactly the features of Bitcoin influenced this formation is a matter of empirical analysis, and thus merely loosely connected to economics (Austrian, that is).

I give you that it is possible that without government interference, the decrease of transaction costs might have been insufficient for the price of Bitcoin to emerge (i.e. to counter the network effect of a free market money). It is even more likely that without a preexisting monetary system in general, the price of Bitcoin would not emerge (since there would be no forex markets). But again, this is a comparison of heterogeneous variables and can't be taken as an economic rule. Nevertheless, from a practical point of view, since we do have a monetary system, and we do have government interference in money, there is no necessity to determine what would have happened in the absence thereof.

One potential mistake in Mises' arguments is the ignorance of goods which are neither consumption goods, nor production goods, nor media of exchange (as I explained above). Once this is amended, the regression theorem becomes interpretable from a new light.

Selgin calls Bitcoin "quasi commodity  money": http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2000118 , however he does not explain the emergence of the price thereof. Murphy, in the video you reference, argues that speculation plus ideology might be a sufficient explanation of what happened, and also says that based on this, it could be argued that Bitcoin is a commodity, albeit an unusual one.

I would simply generalise this into an expectation of the decrease in transaction costs. Bitcoin has a comparative advantage because it eliminates the necessity for money substitutes and provides the same service that historically required a bank clearing system (or newer competitors like Paypal or Western Union). This also includes the features you metion, for example, it's easy for a government to tell the bank or Paypal to freeze your account. I therefore refer to Bitcoin as "money as service", because I think that better explains its dynamic features (as opposed to quasi-commodity).

I presented this "money as a service" idea to several economists. Hoppe thinks it's absurd because

Hans-Hermann Hoppe:

Services lack essentially all money properties: divisibility, durability, portability, etc.

This however is an empirical objection. We do have commoditised services, in particular things that are, like money, subject to the network effect. You can buy online diskspace, for example. I discussed the legal issues (Title Transfer Theory of Contract) with Kinsella to make sure there are no fundamental problems with sales of services (there are workarounds, so it's not a big issue). I tried to explain the "money as a service" to Murphy too. He is also skeptical like Hoppe but at least I think he got my point better than Hoppe. In Murphy's lecture we didn't come to the regression theorem yet, so I'll have another opportunity to ask him about this.

Once a price (of Bitcoin) has formed, the process is sustainable, because there are people who want to speculate and will continue as long as they expect to be profitable. Volatility or a falling price is not a problem for professional speculators. I for example used to do arbitrage between Mt.Gox and Tradehill during a falling price and was able to be profitable.

So the latest spin is that the regression theorem only applies in a free market, not where there is a coerced govt interference in something or other.

Well, that's wrong.

Here is my challenge, which I predict none of you will be able to do: Summarize the regression theorem [and its proof] so we are all on the same page, then show exactly why it falls apart unless we are talking about a free market society. Or, equivalently, show exactly why it doesn't apply in a coerced environment.

Extra credit: Explain why it does apply to fiat currencies, even though they are coerced as well.

Remember, asserting is not the same as proving. The burden of proof is on you guys, because my explication of the regression theorem on my blog applies even when there is all kinds of coercion.

And TY gotlucky for your kind words.

To make clearer what I mean, suppose someone would claim that the Pythagorean Theorem that A squared plus B squared equals C squared does not apply when the traingle is drawn in red. The burden  would be on him to show which line of the proof is correct only when the triangle is black.

That's what I'm asking for here. Because that's exactly what you guys are doing to the regression theorem, inserting some ridiculous qualification. Have at it.

Smiling Dave, I'll work on that if you work on this:

Bitcoin only represents the first challenge to the 'intellectual purity' of Mises' Regression Theorem. Other challenges will come from the field of nanotechnology where original use and origin of value will start to lose meaning. Bitcoin is a pre-cursor to nanomoney. How will we pay for anything in a future world of ubiquitous artificial molecular machine systems?

See "Tangible Nanomoney" by Robert Freitas.

Smiling Dave,

I understood you to mean that money is based on belief and nothing more. That if everyone believes that X is money, it is money. Which is true after a fashion. But there is an underlying question one should think about. "Are all objects equally likely to inspire belief in their being money? Are there some things [say excrement] that we can safely assume will never be accepted as money? Can we discover what features of a thing will preclude so many people from believing it is money that we can predict with a great degree of confidence that it will never be believed to be a money?

The discussion here is about those questions. Mises claims to have deduced from self evident axioms and impeccable logical deduction that people will only believe a thing to be money [other than a few fools here and there, who will believe anything] if it has direct use. I invite you to summarize his line of reasoning and show where it is flawed.

If Jesus raised Lazerus from the dead how many witnesses does it take for it to become a verifiable fact?

How many fools does it take to believe bitcoins are money before it becomes true after a fashion?

If I am going to discern "facts" in order to offer "proof", I want to know how many witnesses it takes to establish evidence?