The regression theorem explains that media of exchange must have a price (which Mises calls "objective exchange-value"), and in order for this price to emerge, it needs to be backtracked to barter. It is an odd way of phrasing the phenomenon of the network effect. Mises explains this in ToMC when he says that people want money not only because they use it directly, but because they other people demand it. He explains this results in a change of ordinal ranking caused by the preferences of other people. This explanation is identical to that of externality: utlity a person derives from a good is influenced by the utility others derive from it.
Some people interpret this as that the "backtracking" requires a legal or a coercive (which explains fiat money) foundation. Mises however elsewhere argues that, for example, money substitutes do not require a legal link for redemption, a customary redemption is sufficient. Then there is no reason why this restriction should apply to the link in the evolution of money in the narrower sense either. In other words, if a medium of exchange trades against other media of exchange, it does not matter why as long as it works.
Since Bitcoin has a price, and has a historical link to preexisting money (see http://www.bitcoincharts.com, for example), either it fulfills the regression theorem, or the regression theorem is wrong. Take your pick. How exactly the price emerged might be of interest to economic historians, for the purpose of the regresison theorem, however, is irrelevant.
The reason why some people claim that Mises' Regression Theorem disproves Bitcoin (rather than the other way around) is that they are making implicit assumptions which I already explained, for example:
These are just what I said, implicit assumptions. Mises only made the first one, he didn't make the others. Those were made up by his faux-followers.
Even before Bitcoin, economists have already predicted the emergence of completely virtual currencies on a free market. Selected references:
The last one is, in my opinion, the most accurate prediction, because it foresees the issues with integration with existing monies, and also that the advantages of this new money can, under certain circumstances, overcome the network effect of fiat money. Here's a quote:
Krüger und Godschalk:Der technologische Fortschritt und Erneuerungen im Zahlungsverkehr führen zu einer erheblichen Senkung der Transaktions- und Informationskosten. Bedingt durch diese Senkung kann die Alternative der Nutzung unterschiedlicher Währungseinheiten wieder aus wirtschaftlichen Gründen eine Renaissance erleben.
or in English:
Krüger und Godschalk:The technological progress and innovation in payments leads to a significant decrease of transaction and information costs. This decrease can cause a renaissance of this alternative, the use of different currency units, due to economisation.
Jon Matonis:See "Tangible Nanomoney" by Robert Freitas.
Brilliant link, Jon. This quote says it all:
Robert Freitas:In a nanotechnology-intensive world, any form of physical currency whose value depends solely upon the physical arrangement of common atoms must likely fail one or more of the above criteria.
Jon,
I read the paper you linked to, but fail to see how his speculations disprove the regression theorem.
Please enlighten me. Keep in mind the example of the triangle drawn in red, meaning show me exactly which line of the proof of the regression theorem is "challenged" by bitcoin or by idle speculations concerning nonexistent moneys. Don't forget to first summarize the theorem and its proof.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
1. If Jesus raised Lazerus from the dead how many witnesses does it take for it to become a verifiable fact?
Let's not mix religion into this discussion.
2. How many fools does it take to believe bitcoins are money before it becomes true after a fashion?
A very good question. I will answer with a paraphrase of an old song by Arlo Guthrie. When you can get anything you want with bitcoin. Economists use the ambiguous phrases "genarally accepted" and "widely used". I like to use the example of cigarettes in a prison, where you can get anything you want with cigarettes.
So far, nobody on the face of the Earth buys more than one thousandth of his weekly purchases with bitcoin. No store or company will deal mostly in bitcoins. Sure, you can buy some odds and ends, the internet equivalent of stuff offered one time only at a garage sale, but nobody has a bitcoin business, where he makes thousands and thousands of, say, sandwhiches or even software, rubbing his hands and saying "Oh boy, I'm gonna have me some bitcoin from all this. That's why I opened my business, to pile up mountains and mountains of bitcoins, Mwahaha."
And once again, Mises Theorem explains why bitcoins, with all the wonderful advantages it has, hasn't hit it off [and predicts it never will, based on logic]. Bitcoin has a FATAL FLAW. Nothing can cover up for this fatal flaw.
Smiling Dave:Please enlighten me. Keep in mind the example of the triangle drawn in red, meaning show me exactly which line of the proof of the regression theorem is "challenged" by bitcoin or by idle speculations concerning nonexistent moneys. Don't forget to first summarize the theorem and its proof.
Since in the Misesian/Rothbardian system, there are no immaterial goods (more precisely, they are neither production goods nor consumption goods), if you insist that a new money must have a legal link to a previous money, on a free market, this would mean that once people develop a sufficiently advanced nanotechnology or nuclear synthesis, there cannot be money anymore. Since the old money would become worthless, a legal link to it would be equally useless. And since the physical distinction among physical goods would be rendered irrelevant, there could be no new money arising from a commodity. So if your assumptions are correct, such a world would be stuck forever in a state of barter.
Smiling Dave:And once again, Mises Theorem explains why bitcoins, with all the wonderful advantages it has, hasn't hit it off [and predicts it never will, based on logic]. Bitcoin has a FATAL FLAW. Nothing can cover up for this fatal flaw.
Mises' Regression Theorem does not explain any such thing. Its purpose is to explain how prices of media of exchange form. Since Bitcoin already has a price, either it conforms to MRT, or MRT is wrong. Whichever you pick depends on how you interpret the individual components of the theorem, as explained above.
None of the interpretations leads to the conclusion you are presenting. You never coherently explained this alleged "logic" underlying your position.
1. The regression theorem explains that media of exchange must have a price (which Mises calls "objective exchange-value")...
First mistake. You don't understand what objective exchange value is, and/or what a price is.
2. ...and in order for this price to emerge, it needs to be backtracked to barter...Second mistake. The regression theorem doesn't backtrack anything to barter.
3. It is an odd way of phrasing the phenomenon of the network effect.
Third mistake. Network effect has nothing to do with the regression theorem.
4. Mises explains this in ToMC when he says that people want money not only because they use it directly, but because they other people demand it. etc etc.
A true statement, but unrelated to the regression theorem, so fourth mistake.
5. Some people interpret this as that the "backtracking" requires a legal or a coercive (which explains fiat money) foundation. Mises however elsewhere argues that, for example, money substitutes do not require a legal link for redemption, a customary redemption is sufficient.
True.
Then there is no reason why this restriction should apply to the link in the evolution of money in the narrower sense either. In other words, if a medium of exchange trades against other media of exchange, it does not matter why as long as it works.
However, all this has nothing to do with the regression theorem. So fifth mistake.
6. Since Bitcoin has a price..
True
and has a historical link to preexisting money (see http://www.bitcoincharts.com, for example),
True, in the sense that some fools were buying and selling it to each other, and there is a record of their foolishness. But that has nothing to do with the regression theorem. Because the regression theorem discusses media of exchange, which bitcoin never was, is not now, and Mises predicts never will be.
either it fulfills the regression theorem, or the regression theorem is wrong.
Nope and nope. It is not a medium of exchange.
7. The reason why some people claim that Mises' Regression Theorem disproves Bitcoin (rather than the other way around) is that they are making implicit assumptions which I already explained, for example:
And only black triangles comply with Pythagoras' Theorem.
8 .Reference all the people you want, but first explain why Pythagoras' Theorem only applies to black triangles.
Bottom line: The summary both of the regresion theorem and its proof is all wrong. So of course the rest of the post is irrelevant.
Since in the Misesian/Rothbardian system etc etc
I dunno Pete, I guess you are just too smart for me, because to my limited mind all you wrote is just meaningless rambling.
But that's OK. Maybe someone else gets it.
Mises' Regression Theorem does not explain any such thing....
Finally, we are getting somewhere. It sure does say such a thing.
My good ole blog laid it all out [look for Bitcoin Takes a Beating]
Smiling Dave:So far, nobody on the face of the Earth buys more than one thousandth of his weekly purchases with bitcoin. No store or company will deal mostly in bitcoins. Sure, you can buy some odds and ends, the internet equivalent of stuff offered one time only at a garage sale, but nobody has a bitcoin business, where he makes thousands and thousands of, say, sandwhiches or even software, rubbing his hands and saying "Oh boy, I'm gonna have me some bitcoin from all this. That's why I opened my business, to pile up mountains and mountains of bitcoins, Mwahaha."
Here you make two implicit assumption:
The first one I already addressed, so let's take a look at the second one. It has no solid foundation in economic theory, it looks more like something someone who dipped a bit into economics might come up with. Liquidity and the number traders are heterogenous variables and while there often an interrelationship between them, it's not absolute. Also, it neglects transaction costs (again).
Bitcoin is highly liquid. If you look at the bid queue on Mt. Gox, it shows a sum of 25 million, which is more than the number of Bitcoins that will ever exist, and over 3 times the number of Bitcoins currently in existence. Selling Bitcoins is trivial, and I can do it faster than going to a shop accross the street and "sell" my euros. This liquidity is upheld by professional speculators, who know how to earn from price fluctuations. Also, if the price drops, this causes a new influx of speculators (or at least money from the old ones), because the number of Bitcoins is limited and they can get a greater chunk of the pie that way. This will bid the price up again.
While the speculation goes on, the development of user friendly payment systems (for example Bit-Pay.com) and other services is performed by others. There are certain parallells to what happened with Linux, or the internet, except that the hype came relatively early for Bitcoin. But since Bitcoin is decentralised, there was no way of preventing the bubble, or for that matter, formation of markets in the first place. In fact, some people, including the lead developer Gavin Andresen, predicted the bubbles. But as I said, there's nothing he could have done to prevent it. The evolution of the price of Bitcoin, and the services built upon it, need to be considered separately.
Smiling Dave:First mistake. You don't understand what objective exchange value is, and/or what a price is.
If you do not believe me, go and ask any Austrian economist. You on the other hand, have provided no alternative, just that you disagree.
Smiling Dave:Second mistake. The regression theorem doesn't backtrack anything to barter.
I provided about 5 quotes which explain this. Some claim that rather than backtracking to barter, it just needs to backtrack to a commodity (regardless of whether in barter or in a monetary system)
Smiling Dave:Third mistake. Network effect has nothing to do with the regression theorem.
Since I provided an explanation and you didn't, I have it difficult taking this seriously.
Smiling Dave:A true statement, but unrelated to the regression theorem, so fourth mistake.
Why exactly is it unrelated?
Smiling Dave:However, all this has nothing to do with the regression theorem. So fifth mistake.
Again, just an assertion. Your response lacks the essence of a response: an actual argument.
Smiling Dave:Because the regression theorem discusses media of exchange, which bitcoin never was, is not now, and Mises predicts never will be.
Robert Murphy disagrees and claims that Bitcoin is a medium of exchange: http://www.youtube.com/watch?feature=player_detailpage&v=wyUNdzLwte4#t=1563s Robert Murphy, the guy who wrote the study guide to Theory of Money and Credit.
Smiling Dave:Nope and nope. It is not a medium of exchange.
In other words, you made something up and then present it as a "theory". Bitcoin is a medium of exchange and only dogmaticsts like you refuse to accept that.
Smling Dave:And only black triangles comply with Pythagoras' Theorem.
Lack of argument again.
Bottom line: you present zero arguments or counterarguments, the only thing you say is that you disagree with me. That's not even childish, that's just intellectual fraud.
Peter Šurda: The reason why some people claim that Mises' Regression Theorem disproves Bitcoin (rather than the other way around) is that they are making implicit assumptions which I already explained, for example: there are only production goods, consumption goods and media of exchange the number of users takes absolute precedence in the outcome of the network effect a medium of exchange requires some arbitrary starting price, which is above that of Bitcoin These are just what I said, implicit assumptions. Mises only made the first one, he didn't make the others. Those were made up by his faux-followers. Even before Bitcoin, economists have already predicted the emergence of completely virtual currencies on a free market. Selected references: Tatsuo Tanaka (1996): Possible Economic Consequences of Digital Cash Michael Woodford (2000): Monetary Policy in a World Without Money Malte Krüger und Hugo Godschalk (1998): Herausforderung des bestehenden Geldsystems im Zuge seiner Digitalisierung - Chancen für Innovation?
I actually prefer the 1996 Tanaka article because he anticipates the bearer qualities and characteristics of digital bearer instruments which is the 'true' definition of digital cash. See my page http://digitalcash.org/ The other reason that I prefer Tanaka is that that he cites my work in note 22. How's that for my own academic regression theorem?
While I understand where you are going with qualitative vs. quantitative features, I maintain that a modification to Mises' Regression Theorem is justified because the 'binary features of value' possible with negotiable digital bearer instruments have transcended the Theorem. This is not to say that Mises was wrong, it is just that he did possess all of the unknowable knowledge at the time. The bitcoin feature difference is qualitative and one way that this is demonstrated is through BrainWallet. BrainWallet allows one to memorize the bitcoin private keys in your brain with no other physical representation. People can literally send money to your brain and you alone possess the method to re-assign that portion of the block chain. Their existence and, moreover, their specific attachment to you cannot be proven anymore than your possession of an air guitar can be proven. If you say that air guitars are an absolute qualitative difference from real guitars than you have to say that bitcoin characteristics of survivability and non-confiscation are an absolute qualitative difference too. It is not a difference that's on a relative quantitative scale.
When you can get anything you want with bitcoin.
I just want to understand the meaning of "get anything you want." How do you measure that exactly?
Ancient Chinese used cowry shells as currency which had no intrinsic use I am aware of. Since you would argue a whole geographical region the size of China used currency that was not money because it doesn't conform to the theorem I want to understand the measurement. Does "anything you want" mean if I have cowry shells but I want something in Egypt, I am not aware exists, and they don't accept cowry shells, mean it can't get me anything I want? What if cowry shells get me anything I want in China, does that count?
Furthermore, there are places that do not accept cash. Cash may not get "anything you want." In light of this how is cash still considered money?
Please elaborate how to measure "get anything you want" because there is an inconsistency here. Apparently there is a minimum threshold to "get anything you want" but even if it is not accepted everywhere you can still "get anything you want."
And what about private credit? What was the intrinsic value of Diners Club private credit before Mastercard and Visa came along? Can you "get anything you want" with private credit that has no intrinisic value from Visa or Mastercard despite they are not accepted everywhere but may be commonly used?
Jon Matonis:I actually prefer the 1996 Tanaka article because he anticipates the bearer qualities and characteristics of digital bearer instruments which is the 'true' definition of digital cash.
Each of these articles is slightly different. Tanaka for example only mentions that digital cash can have its own unit of account very briefly and uses this to sound alarm claiming this might affect monetary policy. The other two articles on the other hand say that we should not worry about governments' being able to conduct monetary policy when competing with virtual cash.
Jon Matonis:See my page http://digitalcash.org/ The other reason that I prefer Tanaka is that that he cites my work in note 22. How's that for my own academic regression theorem?
Nice, didn't spot the citation.
Jon Matonis:While I understand where you are going with qualitative vs. quantitative features, I maintain that a modification to Mises' Regression Theorem is justified because the 'binary features of value' possible with negotiable digital bearer instruments have transcended the Theorem. This is not to say that Mises was wrong, it is just that he did possess all of the unknowable knowledge at the time. The bitcoin feature difference is qualitative and one way that this is demonstrated is through BrainWallet.
I am afraid I don't understand your point. If you have a bearer instrument, it still needs to have a price to be usable. Sure, digital goods have sometimes advantages over analog ones (e.g. ebooks vs books). But that alone does not create value. There needs to be something more. I suggest low transaction costs as a decisive factor for media of exchange, because this allows liquidity.
Jon Matonis:BrainWallet allows one to memorize the bitcoin private keys in your brain with no other physical representation. People can literally send money to your brain and you alone possess the method to re-assign that portion of the block chain. Their existence and, moreover, their specific attachment to you cannot be proven anymore than your possession of an air guitar can be proven. If you say that air guitars are an absolute qualitative difference from real guitars than you have to say that bitcoin characteristics of survivability and non-confiscation are an absolute qualitative difference too. It is not a difference that's on a relative quantitative scale.
This is just a method of using Bitcoin. A cool one, admitted, but that alone does not create value. The point is that Bitcoin is easy to transfer. If it wasn't, no matter how cool it was, it wouldn't work as a medium of exchange. The extreme counterexample I was able to come up with are black holes. They are difficult to steal, not prone to a decrease of mass, and it's easy to send new matter into them. But they are not easily transferrable (you can't move them very well or withdraw matter from it), so they are not useful as a medium of exchange.
Maybe I'm just more Austrian than you :-).
Would you be willing to chat on skype or something? I think we can exchange a lot of interesting thoughts.
Smiling Dave:because to my limited mind all you wrote is just meaningless rambling.
What particularly you have a problem understanding?
Also one more thing re Smiling Dave. Even if we disregard the question of Bitcion being a medium of exchange (which you due to ideological reasons deny), me pointing out that immaterial goods exist and have value, despite not fitting into any of the three categories (consumer goods, producer goods, media of exchange) invalidates the argument against Bitcoin. It becomes a false dilemma fallacy, as the threefold classification is non-exhaustive.
Yet again, I provided point by point refutations of your claims, and you, yet again, not only failed to mount a successful defense, you're not even willing to describe your own position. Why anyone pays attention to you is a mystery to me. But since I'm not a psychologist, I'm content with not knowing the reason for that.
Livefree,
Wikipedia on cowry shells:
Shells of certain species have historically been used as currency in several parts of the world, as well as being used, in the past and present, very extensively in jewellery, and for other decorative and ceremonial purposes.
Credit cards are not money. They are convenient ways of using dollars as money. Try to pay someone by handing him your credit card and see what happens. Bitcoins, however are not used to pay someone with dollars. They themselves are the money, supposedly.
As for getting anything you want, the line is not clearly drawn, wrote Mises. You'll see phrases like "generally accepted" and "widely used". In short, look in your fridge, your pantry. Look around the place you are at right now. Check your mail for bills. How many of the things you see can you buy with bitcoins? Close to none, right?
As for places not accepting cash, they do want to be paid in dollars, right?
Pete:
All you write is probably way over my head, because it just makes no sense to me. Guess I'll have to settle for my own poor understanding.
Smiling Dave,
what in particular don't you understand?
I can accept the point about cowry shells used in jewelry however it still doesn't address vague terms and that shells were not accepted everywhere but commonly accepted in some parts of the world.
Credit Cards on the other hand I am willing to further debate. In addition to debating this point I can cite a court motion someone I personally know submitted to a court in a credit card controversy that resulted in a major credit card company defaulting.
So let me address how court works. Credit card companies send you a letter claiming you owe a debt. When you do not respond the credit card company goes to court and says hey court, we sent this person a notice of a debt and they did not respond. The court takes a position honorable people respond and tells the credit card company the court will send notice on behalf of the company. If you do not respond to the courts notice you are found to be in default at a hearing.
So here is what someone I personally know did. They did not respond to the court notice but showed up on the day contained in the notice for the hearing. Obviously a default judgement is the only likely outcome of this hearing without any pevious response. It was basically said:
Your honor of course I will pay any debt owed however I demand proof for any debt claimed. I demand more than some notice I owe a debt because anyone can send anyone a notice they owe a debt. I demand evidence for a source of funds I received and an official agent of the company who can testify to such a source of funds along with book keeping records to evidence the source of funds. The court recognized the legitimacy of the demands and provided the credit card company thirty days to respond. The credit card company never responded which resulted in a dismissed case as a result of their default. At the time I suggested to the person I know they ought to motion for a dismissal with prejudice and then sue for fraud but tthey never did. :) On a side note... all of the attorneys present in that court room asked for a copy of the motion and weeks later I noticed several interesting debt relief ads from law firms on TV. Miracle theory? Who knows but an interesting coincedence nonetheless.
Private credit != dollars.
If they do not accept cash and only accept private credit how can you think they want to be paid in dollars? Maybe they do want to be paid in dollars but are too FOOLISH to realize private credit is not dollars. How many FOOLISH people does it take before something becomes as you say.... a fact? If Visa or Mastercard went bankrupt tommorrow because FOOLISH people lost confidence in private credit would vendors that accepted private credit today receive any dollars?
You admit "generally accepted" or "widely used" have no measure which means you are asserting a theory you can't empirically prove yet demand proof of others to empirically disprove something you can't prove.
Now I don't have the answer but I will suggest something. People talk about bell curves, early adopters, and things like that when a product hits the market. I would speculate ideas are similar which would provide some kind of probabilty trending to concepts such as "widely used." I am also going to go out on a limb regarding the regression theorem and this whole belief in commodities. When people see something being used it becomes possible for valuation to occur. If people are not aware something exists there is no valuation. This is a big reason why when we talk about what is likely to become money we say it has to be a commodity first. However I do believe anything is possible if people choose to believe in it. Private credit illustrates this point because private credit is not a commodity it is a promise to pay and people choose to believe in this promise accepting it. It is not a new phenomenon with regards to money because we can trace believing in promises back to gold wharehouse receipts. I do think it is possible for an environment to become so, for lack of a better word, bad, that people could consider using something like bitcoins. i do think it is possible if a bad environment continued to worsen where people began to lose hope it becomes easier for people to believe in the "impossible." Does the regression theorem account for such a possibility? I don't know. I'll get back to you if it happens. You would argue it is impossible because people would resort to trading with what they know and can value (ie. a commodity) which is easily explained by the regression theorem... well... despite that the regression theorem talks about what people are likely to believe there are a lot of fools who accept private credit.
Look around the place you are at right now. Check your mail for bills. How many of the things you see can you buy with bitcoins? Close to none, right?
https://en.bitcoin.it/wiki/Trade
I dunno, seems like I could get quite a few things with bitcoins. There is even a precious metal section in the wiki.
Live Free,
0. In those parts of the world where cowry shells were commonly accepted, it was money. In places it wasn't accepted, it wasn't money. Niot sure what the problem is here.
1. I don't see the relevance of credit cards. Nobody thinks credit cards are a new money. You don't have the dollar, the euro, the swiss franc, and the credit card. The underlying money that credit cards move from one person to another is dollars [in the US]. Bitcoins, on the other hand, are themselves the money.
2. I did not ask for empirical proof of anything, rather for logical proof, or more precisely, a logical chain of reasoning to show exactly where the regression theorem's chain of reasoning falls apart in the various circs people here have claimed. In other words why doesn't pythagoras theorem apply to green triangles?
3. As for the argument that anything is possible if people believe, or if they lose hope, what can I say? I am not used to such ways of reasoning. None of my Math professors told me that 2+2=5 if enough people believe, or lose hope.
Maybe you mean that if enough people believe something is money it will become money. Fine. But the regression theorem discusses what makes people believe something is money, and it claims that bitcoin has a FATAL FLAW which will stop people from ever believing it is money.
True, if the whole world simultaneously dropped acid in strong enough quantity, then the regression theorem might not apply for as long as their trip lasted. But we aren't talking about that, are we?
4. The only way I see a point in continuing the discussion, lively and interesting though it is, is if you would first summarize both the statement and the proof of the regression theorem. Because your whole argument about people accepting private credit tells me we have different understandings of what the regression theorem says.
as Robert Murphy says in the referenced video, which is oddly similar to what I said in the past too, the question whether Bitcoin invalidates regression theorem or not depends on how you inteprets its components. The claim that you present here, that the regression theorem somehow disproves Bitcoin, on the other hand, can't be logically derived from Mises' writings.
How about instead of rambling, you start presenting actual arguments, starting with formulating definitions, assumptions and the logical operations that fit together?
Oh wait, that would mean that you would need to grow up. I see how that might not be appealing to you.
Live_Free_Or_Die:I dunno, seems like I could get quite a few things with bitcoins. There is even a precious metal section in the wiki.
He doesn't care. He lives in his own imaginary world which is immune to logic.
OK, the Bob Murphy video.
He says that Mises was only talking about gold, but not that every possible money under the sun, in all of past present and future history, must start off the way gold did.
Which goes to show you he didn't read my blog, where I quote Mises in Money and Credit saying explicitly that indeed he is talking about every money under the sun. that was and that will be. I also quote Rothbard and others who said the same thing.
Murphy makes the following argument in his video.
1. If Mises meant it for all moneys, ever, then it has to apply to all media of exchange as well.
2. In particular, it has to apply to bitcoin.
3. But bitcoin is a media of exchange which does not fulfill the criteria of this understanding of the regression theorem.
4. Therefore Mises' theorem was talking about gold, historically, but not about every money imaginable.
His mistake, of course, is step 3. If you watch the video, you'll see that he didn't read my blog, where I explain why he is mistaken.
Robert Murphy didn't make the "1 2 3 4" argument you're presenting. First of all, he admitted two possibilities: Mises was wrong, or Bitcoin is a (weird) commodity. So a linear representation of his position is wrong.
Furthermore he didn't say that Mises didn't say that "all money must originate as a commodity". He said that he doesn't think Mises explicitly said that in ToMC, but once David Gordon quoted to him from HA where he says something like this stronger. Coincidentally, I also emailed with David Gordon about this in the past, and he also quoted HA, presumably the same one he did to Murphy.
But again, even if Mises was correct in that a medium of exchange must have value when it becomes a medium of exchange, it still does not mean that Mises refutes Bitcoin. This is an elementary logical error. The only possible conclusions are that either Mises was wrong, or that indeed Bitcoin had a value when it became a medium of exchange. Denying that Bitcoin is a medium of exchange is an ideological argument. Whether something is or is not a medium of exchange is an empirical question, not an economic one. Mises defines a medium of exchange as thus:
Ludwig von Mises:Under indirect exchange, you sell your product not for a good which you need directly, but for another good which you then, in turn, sell for the good you want.
and
Ludwig von Mises:Interpersonal exchange is called indirect exchange if, between the commodities and services the reciprocal exchange of which is the ultimate end of exchanging, one or several media of exchange are interposed.
As long as someone accepts something with the intention of using it in another exchange, rather than consume it or use it in a production process, it is a medium of exchange.
Furthermore, it is very rare that a good has a zero price. Even paper money has some non-monetary uses, for example there was a recent news story about Hungarian bank notes being used for heating. Any non-zero price is usable as a starting price. And inded this is what happened with Bitcoin, as the speculation presented by Murphy also demonstrates. People started trading Bitcoins very cheap, at an practically insignificant, but non-zero, price. Why it had this price is, from economic point of view, irrelevant. Over time, markets evolved which allowed these trades to occur easily and quickly. This allowed the ad-hoc trades to equilibrate to a relatively uniform price. Because this happened, this only supports the suitability of Bitcoin as a medium of exchange: it's easy to transfer, and sufficient liquidity formed. As long as there's liquidity, this suitability will persist.
But even if Bitcoin wasn't a medium of exchange, as I said already several times, the argument that this somehow refutes Bitcoin, because it is a false dilemma fallacy (since there are valuables than producer goods, consumer goods and media of exchange).
Even David Gordon who supports your presentation of Mises' opinion, didn't say that this disproves Bitcoin. In an email to me, he said:
David Gordon:Whether he (Mises, ed.) was right is of course another matter, though it seems to me he makes a good case.
So, a summary of some of the errors you are making:
But this alone will not suffice to explain the problem of the element of continuity in the value of money; it only postpones the explanation. To trace back the value that money has today to that which it had yesterday, the value that it had yesterday to that which it had the day before, and so on, is to raise the question of what determined the value of money in the first place. Consideration of the origin of the use of money and of the particular components of its value that depend on its monetary function suggests an obvious answer to this question. The first value of money was clearly the value which the goods used as money possessed (thanks to their suitability for satisfying human wants in other ways) at the moment when they were first used as common media of exchange. When individuals began to acquire objects, not for consumption, but to be used as media of exchange, they valued them according to the objective exchange value with which the market already credited them by reason of their "industrial" usefulness, and only as an additional consideration on account of the possibility of using them as media of exchange.
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.
dvide,
I hereby welcome you to the forums. I read your post with great interest, and am impressed by its clarity and logical reasoning.
First the little things.
1. I have no dog in this race. There is no ideology that makes me think bitcoin is doomed according to the regression theorem. More important, as Mises pointed out, ones motives for presenting an idea neither strengthen nor weaken the idea itself, which must be examined on its own merits, not the motives of the writer.
2. I'm glad you bothered to read my blog and indeed understood what I was saying. Delve deeper, my son, to another post there, where I quote Mises in Money and Credit. You will see that he is just as confident etc. in that work about the consequences of his theorem as he is in HA.
3. OK, now to the part of your post I found very refreshing and intellectually stimulating. Your argument, as I understand it, is that Mises found ONE OF MANY POSSIBLE EXPLANATIONS for the initial evaluation of a medium of exchange. It is the simplest, maybe, the most elegant, perhaps, but our man Mises has not proven that every other possible explanation is wrong.
For example, he did not disprove that perhaps aliens from another planet with mind control abilities zapped the planet at some moment and hardwired everyone to think "Gold is worth $25 an ounce." You grant this is a silly explanation, but not one that is logically disproven by Mises' reasoning.
Similarly, the argument that a small group decided to arbitrarily give some value to a valueless thing to facilitate trade among themselves, and then more wannabees joined the fun, until the inherently useless object takes over the world and everyone uses it as money, has not been logically disproven by Mises.
And indeed, I admit that the article I wrote, Bitcoin Takes a Beating, did not address this and neither did Mises in the section I quoted there. He polishes off all alternative explanations, Martians, etc. in Money and Credit, where he writes [and I quoted him here]:
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 of the 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 of money from a general agreement to impute fictitious value to things intrinsically valueless, [like those stupid bitcoins]...
There you have it. [Note that it is basically a restatement of the very problem the regression theorem tries to answer, so it's not really some new assumption].
Now we get to deep waters. What did he actually mean in that little parenthesized phrase? I confess that until now I thought he meant one thing.
You can read this or this [don't forget the comments], where I expand on what he meant, restricting myself to the case of bitcoin.
Or you can read on and let me lay out the syllogysm yet again:
1. People work hard for their purchasing power, and do not like to get tricked into handing it over for something they will not be able to buy anything with.
2. Therefore, faced with the option of being paid in something newfangled that is intrinsically valueless, or just trucking along with whatever they did until now, they will go with the latter.
3. No Martian or religion will change this feature [=1. above] of human nature.
That's what I thought he meant. And it may indeed be what he meant. But let me mull over another possibility. To be continued.
BTW dvide, can I quote your whole post in my blog?
Smiling Dave: BTW dvide, can I quote your whole post in my blog? Yes of course. I promise not to sue for copyright infringement :) though Kinsella would point out how useless that promise is. I may take some time to respond as I have a lot of work I need to be doing tomorrow, and I don't much fancy thinking and writing up a long in-depth post right now. I'm just glad I've found a way to move the discussion forward, if only by an inch. But yes that part in the parentheses would be an argument made I suppose, that there is no other way to begin to estimate the value of the money. Actually I'm not sure if that's an assertion or if it was an argument logically shown. Either way I'm not sure it's quite right, or that, for instance, you can't even begin to estimate the value of a bitcoin. I feel like I have already attempted to estimate the value of a bitcoin to me, and found it to be non-zero, but you would only argue that I am a fool. And we might just be talking historically here, in the context of the part in parentheses. Mises was explaining the rise of money in a time before the concept of money even existed. In that context, people obviously could not have been in a position to estimate the monetary value of a good, because they didn't even know what money was. But now we do have the concept of money, and even in-depth economic understanding of it, so you could say that an individual can start to estimate the value of a new money good even if he just throws a semi-arbitrary exchange-ratio out there. Historically one of the first trades, if not the first trade, was something like 10,000 bitcoins for 2 pizzas. So it does seem as though somebody was in some position to estimate a semi-arbitrary exchange-ratio of what he thought those bitcoins were worth to him, for whatever reason, even if it was just for the novelty aspect of paying for something, anything, with his bitcoins. And since then the prices have converged to something less arbitrary, that reflects the subjective valuation of more people. That could be the case, but I can't think of a way to express my intutition on it from a non-emperical perspective so I'll have to ponder on it a bit more. Also I'll leave this page from Human Action here for discussion because I think it's interesting. Here Mises explicitly denies that the theorem is technically just a historal account rather than an apodictic one, that proves it could not happen any other way. I don't think I agree that this is what he showed, but maybe that would get into the philosophy of science. I'm not a scientific realist, so that might account for why I don't see it as an apodictic proof where maybe Mises did. I'm not sure if that will be a fruitful avenue to explore, but I'm not going to delve into it right now. Sorry for this off-the-cuff reply. I can't be bothered editing it to make it flow better and read well compared to my previous post, as I'm tired, so you'll have to forgive my rambling reply. Just want to get something in because tomorrow I have to commit to working. | Post Points: 5
as I pointed out several times already, the claim that Bitcoins are intrinsically valueless is both irrelevant as well empirically wrong. It is irrelevant because Mises only considers three alternatives (consumer goods, producer goods, media of exchange), which is a false dilemma fallacy. It is empirically wrong because you mistake anecdote for data. What you mean is that you find Bitcoins intrinsically valueless, not that it does not have a market price. Empirical data shows, as dvide rightfully pointed out, that people ascribed it value (a very low, though positive one) before it was a medium of exchange.
There are plenty of ways to rescue the regression theorem from Bitcoin, or you could just say that Mises was wrong. Your conclusion however is methodologically invalid. Also, the fact that you refuse to confront your errors is an indicator of ideological motivation. But I'm not going to fall into the same trap (false dilemma fallacy) as you. There are many other possible explanations. For example, you could be just stupid.
If we go back to the great depression when there was a run on banks did federal reserve notes lose their status as money because people no longer wanted them because they believed they no longer had purchasing power? If a thing ceases to be money because people no longer believe it has any purchasing power how does the regression theorem account for federal reserve notes becomming money again? The reggression theorem is absent force. However force is the reason federal reserve notes have purchasing power. Whereever force rears it's ugly head it is met by it's counterpart resistance. Resistance is the phenomenon I attribute to bitcoin.
Regarding 2+2=5.
2 (2 in base 10) + 2 (10 in base 2) = 5 (12 in base 3).
2+10=12 == 2+2=5
Live_Free_Or_Die:The reggression theorem is absent force.
Well, this is debateable. One could also relax the conditions of a physical commodity and allow for all kinds of "strange" goods. For example there is an article Fiat Money as Administrative Good by Kuznetsov (I'm too lazy to look up the URL, but it was featured as Mises Daily and also published in one of the journals that specialise in Austrian Economics). It claims that fiat money can rescue you from goverment using guns on you, so it's a type of good. You can do the same with Bitcoin and claim that the ideological and/or speculative background is an unusual good, and this created the starting price, before Bitcoin was a medium of exchange.
1. As promised, here is the other possible interpretation of Mises' parenthetical statement, which, he claims, destroys every other explanation for the origin of a money. Let's first quote him again.
...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 of the money)...
You can scroll up to here for one explanation of what he meant.
Here is another, shamelessly copied from what people wrote here a few months ago. And I quote:
JJ: does a money really have to have non-monetary value, and if so, why?
Smiling Dave: It does, because otherwise it's price, say $17 per bitcoin, is basically a fad. Meaning that's what people are willing to pay now, but there is no guarentee they will be willing to pay that tomorrow, because there is no reason for that price. Why is the price $17, and not $10, or ten cents?
People sense this, and at some point will start to worry. They will want to unload their bitcoin for something substantial. They will refuse to accept it as payment. Sooner or later, everyone will lose faith in the other person being foolish enough to accept a bit coin in exchange for $17 worth of hard work and tangible goods. They themselves will also not be willing to accept a gamble in exchange for their hard work. The downward spiral will begin.
2. Live Free,
You wrote:
If we go back to the great depression when there was a run on banks...
did federal reserve notes lose their status as money...
because people no longer wanted them...?
People no longer wanted them? Then why did they run to the banks? To get free toasters?
Your equation about 2+2=5 is also falacious. Ask someone who knows math.
whether you like it or not, there is a market price for Bitcoin. In other words, its objective-exchange value is linked to other economic goods. This allows individuals to estimate its value. While this does not mean that Bitcoin is money (indeed, that would be a logically invalid argument), it can't by any valid logical step mean that Mises disproves Bitcoin. To claim this is a logical fallacy. To put this into an abstract form, Mises claims "if A, then B". We know that empirically A is true. Since A is an empirical datum, not a result of deductive reasoning, there is no way to derive from this that A is false.
Whether Bitcoin was valued before it was a medium of exchange, and therefore whether Mises was right or wrong, is of course open to interpretation. Both Murphy and me have presented several possible conclusions.
1... there is a market price for Bitcoin...
Everything has a market price. My autographed toenail clippings, for example, can be bought on my website at $1,000 a clip. The cult I'm starting will require all its members to buy them. So what?
2. ... In other words, its objective-exchange value is linked to other economic goods...
No. Go to Theory of Money and Credit, Part two, Chapter 7, and you will see that "objective exchange value" is something that only a money has. Bitcoin is not money. My toenail clippings, valuable and magical and scarce as they are, are not yet money. Neither bitcoin nor my toenail clippings have objective exchange value.
3....This allows individuals to estimate its value...
No. It allows them to know how much they will have to PAY for a bitcoin [or my toenail clippings], but not how much they will GET if they try to unload their bitcoins [or my toenail clippings] in a week or two, not to mention six months from now. See next point for more about this.
4. In the news, AKA how serious people view bitcoin:
CYBERSPACE—In a GFY thread posted up Saturday, Paxum announced that starting immediately it would cease working with any companies using virtual currency Bitcoin. The decision had been forced upon the global e-wallet and money transfer service by its banking partners, the company said.
“This was not an overnight/impulsive choice,” posted Ruth Blair for Paxum. “We had been in discussions with our banking partners, Mastercard and our auditors for the last couple of weeks, and on Friday our banking partners ended the discussions with us and stated that it was too much of a potential risk to continue doing business with Bitcoin and Bitcoin Exchangers and instructed us to close all Bitcoin-related accounts. We had no choice but to follow those instructions and therefore, all Bitcoin associations were severed on Friday.”
Paxum did not use Bitcoin as a currency itself but did allow Bitcoin exchanges to use Paxum as one of their payout options. As of Friday, that option was no longer available to them.
According to Betabeat.com, Paxum started working with the exchanges about a year ago. “Paxum hooked up with leading Bitcoin exchange Mt. Gox in December 2010, major Bitcoin exchange Tradehill in July 2011, and more recently with BitInstant, a service that speeds up Bitcoin transactions by fronting customers the credit, and others,” reported Adrianne Jeffries for the site.
Though Paxum declined to state which banking partners had ordered a halt to any affiliation with Bitcoin, Blair said in the GFY post that “Paxum was not hacked by any Bitcoin user(s), and we have not encountered any fraudulent activity with Bitcoin and Bitcoin-related accounts."
Of course, if you think you are smarter than they are, go ahead, be my guest. Buy bitcoins.
6. Guys I'm tired. No more bicoin stuff. Read my blog, check my previous posts scattered on this wonderfull forum. I'm not gaining anything by repeating or linking to the same ole stuff. Let the readers decide the merits of my case based on the existing body of work.
Here are a few clues to guide you:
Some people here will try to confuse the issue any way they can. This will include introducing red herrings, misuse of technical terms, ad hominems. So look up any phrase they mention, and don't assume they know what they are talking about.
Others are in arrested development and cannot use logic. [TY Jacob, for that timeless phrase].
[Waves to all].
Are you suggesting they went to banks because they wanted to hold onto federal reserve notes? It is said federal reserve notes were money because they had an exchange rate with specie which regresses back to a comodity. During the bank holiday specie redemption for federal reserve notes was outlawed and a brand new currency, federal reserve bank notes, circulated along side federal reserve notes. So how does a federal reserve bank note, with no exchange rate to any commodity, obtain value equal to a federal reserve note? Force...
Am I to presume you do not know math therefore I should not ask you despite that you deem it falacious? The whole original comment was an exercise of perception. I don't really feel like going off the deep end into the truth of "one" in a dimensional context. I simply remarked anything is possible if people believe it. I can think of a several things that were believed to be impossible before they became possible. If something is considered impossible by many people are the actions of the person who believes it to be possible irrational? It ties into the same thing we were discussing earlier. How many witnesses does it take before something becomes a fact.
1) are t-bonds money?
2) if a tribe on a remote island uses cowry shells as a primary medium of exchange (and as jewelry) and starfish as a less-preferred medium of exchange (and for rituals involving starfish), and I jetski out there in an aborigine disguise with a tortoise shell full of cowry shells, and attempt to buy the island piece by piece, but they figure out what I am doing and the exchange rate of shells:starfish flips the other way and keeps going...does this mean that cowry shells are not money, or that they were not money, or that they will return to being money once I leave?
3) assume a tribe of gnomes that have perfect memories; are able to forget things completely, selectively, and verifiably; and love baked goods. Also assume that the intersection of chemistry and gnome preferences makes the invention of a successful recipe for cookies nontrivial. If these gnomes use memorized and forgotten recipes as a medium of exchange, would that make the recipes money?
4) assume a computer scientist develops an algorithm that can spit out any digits of pi selectively (as in "give me the 6 millionth digit to the 8 millionth digit") and accurately in a brief span of time. He also develops an algorithm that can verify the accuracy of digits but not produce them. Suppose he kept the first algorithm secret, made the second one public, released the first 25 million digits to pi to the public and then sold ten 10-million-digit-blocks-of-digits from 1 trillion digits and higher. And the artists and collectors and computer scientists who considered themselves to be the exclusive posessors of these parts of pi traded them amongst themselves according to their rising and falling fortunes, and one guy even bought a house with 30 million digits. Well the guy who sold the house for the digits was a very wealthy, very well-educated man. He was also quite literate, and loved art and math. He actually collected all ten 10-million-digit-blocks, and hired a struggling painter to paint all 100 million digits on a giant canvas. No one knows how, but he did it. Now I direct your attention to the canvas and I ask you........wait, I am forgetting something.
the painter was actually the great-grandson of painter you have probably heard of, the founder of the impressionist school, Claude Monet.
so now I direct your attention to the canvas, and I ask you...is this a Monet?
1. have you read HA, the section about this stuff?
2. are you asking if people will still use them as media of exchange if they become very common, like zimbabwe dollars?
3. see 1.
4. is your point that a photogragh of a hot dog is not as edible as a hot dog?
5. why do I feel these are socratic devices?
2. No, I am asking if they were money before I arrived, or if they were still money when the value crashed, or if they will return to monetary status when I leave?
3. Gnomes are not human. Also, which part addresses this?
4. no, this was half joke and half a point about the arbitrary nature inherent in assignation of meaning to phoneme.
5. I actually didnt expect you to reply, as it seemed you had decided not to discuss bitcoins further. But my questions are socratic in that I intend to bring the discussion forward.
Bitcoin does not contradict the Regression Theorem.
First, the original use of Bitcoin was found in a barter market - Silk Road.
Second, information is a discrete non-material substance that can, and often does, have value.
In fact, the primary reason that labor alone does not create value is that labor must be combined with materials and guided by timely information to produce goods and services of value to the market.
The primary contribution of management to the final value of the products of their industry is the "information" they bring to the process.
****************
A bitcoin is a discrete block of information that has unique properties:
- It can be transfered from Alice to Bob (P2P transfer)
- It can only be transferred once, after which a new Bitcoin is created and the old one added to the spent coin file.
- It is difficult to trace
- Unlike a gold-backed system It does not require a connection to meatspace (the physical world)
- It is scarce and difficult to make more, on a difficulty level comparable to that of gold (which is increased through mining).
Ironically, the primary value of Bitcoin is a reaction to the Welfare State's controls on money. Bitcoin arises as more useful than gold for the purpose of making trades prohibited by the State. This is why Silk Road was the first marketplace to find a use for Bitcoin as a medium of exchange.
In an era of State control over almost everything, Bitcoin is extremely useful. As the "unofficial sector" grows, the usefulness of Bitcoin will grow.
If the Welfare States eventually go bankrupt and fall apart against the realities of the information age, and the forces of decentralization, then they will probably be replaced by less restrictive states that do not have the resources to expend on control of financial transactions and other minutia.
As statist control over monetary transactions decreases, the utility of Bitcoin will decrease, but if by that time Bitcoin has achieved universal usage, then its primary value will not be its ability to bypass monetary controls, but its universality and scarcity.
**************
At any rate, the Regression Theorum holds true for Bitcoin, but you have to realize that information, and not merely commodities has value. Bitcoin may be the first universally tradeable form of information.
Therefore, even though Mises did not forsee a fungible type of information that could be traded and not forged, Bitcoin does have the commodity value of pseudo-anonymity and scarcity that make it very useful in its own right in an era of statists controls over money.