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What Bitcoin is

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Graham,

Trust me, I've been through these arguments many many times. I sense, however, that you have no dog in this race and want to know what's what. [Malachi, look away at this point, please].

I've summarized all I have to say on bitcoin in this article on my humble blog: http://smilingdavesblog.wordpress.com/2012/08/03/bitcoin-all-in-one-place/ The comments on the articles are also informative for the most part.

Since I'm feeling generous, I'll respond to the gist of your post. You say that as we speak bitcoin is being used, by some people at least, as a medium of exchange. No. There is not a person on this planet who uses bitcoin for even 1% of his daily transactions. Nobody goes to the grocery store, or any other store, with a shopping list and a fistful fo bitcoins. Nobody will agree to be paid his salary in bitcoins. Nobody can look in his fridge, or any other largish area of his house, and see it filled with things bitcoins have bought him. In other words, even to the trivial amount of people who have had any interaction whatsoever with bitcoin, it was not as a medium of exchange, meaning something he knows he will go shopping with for most of what he needs.

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AJ replied on Sat, Oct 6 2012 2:08 AM

Graham Wright:

AJ:
A physical medium-of-exchange system is only one type of transaction system. At a certain level of technology, others become feasible or even superior.

I am wondering about the terminology.  Would you still call Bitcoin a medium-of-exchange system - but a non-physical one?  Or would you say it is not a medium-of-exchange system at all because there is no "medium"?  The housemates system seems to involve no medium (nothing changes hands), making all the exchanges between the housemates direct exchanges (but disjointed in time, with the whiteboard-on-the-fridge protocol keeping track).  Is Bitcoin the same in that respect?  There doesn't seem to be anything analogous to bitcoins (the tokens) in the housemates system.

It all depends on the definitions of those economics terms, but the point of this example was to show that no "thing" needs to be exchanged (not even at base). That is, there doesn't need to be any backing, at least in the usual sense of "the dollar is backed by gold." People's willingness to transact in the system comes not from housecoins being backed by anything, but by their expectations that the system will continue working. You could say they're backed by the system, like bitcoins are backed by the Bitcoin protocol. This is technically an entirely different kind of backing, but it seems to serve the same purposes as any other type of backing.

In particular, there seems to be little worry that additional bitcoins will ever be created beyond the initial limit of 21 million. The reason is that more than 50% of users would have to support such a change. This is another example of how the structure of the system constitutes the "backing." We expect that gold will be very hard to mine, and we expect that bitcoins will be very hard to inflate (because the systemic considerations ensure their scarcity).

Housecoins are fundamentally exactly the same as bitcoins; Bitcoin is the Housecoin system writ large, with computers - and cryptographic signing instead of handwritten signatures. There is a hard limit on the total number of housecoins, set by agreement of the users (though with Bitcoin this agreement is enforced far more effectively). Housecoins are just imaginary units in a ledger, and the same is true of bitcoins. 

So what I am saying is this whole idea that some "thing" of value needs to be traded was never a foregone conclusion. The new possibility opened up by systems like Bitcoin is that there can simply be a system - a peer-to-peer public ledger - that keeps track of transactions in such an efficient way that it can be used for buying and selling. You still end up with "tokens" that feel in many ways like dollar bills or gold coins, but if you dig down you find that these "coins" are nothing more than agreements among people.

This difference may be trivial in everyday life, but when arguing the theoretical side it must be kept in mind to maintain clear thinking on the subject.

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AJ replied on Sat, Oct 6 2012 2:13 AM

To address the larger flow of this thread, it seems obvious to me that Bitcoin is an entirely new animal and the old rules are showing how they are not worded precisely enough in the way they would need to be in order to address Bitcoin. It is not a commodity and not a money substitute. Moreover, the idea of "commonly accepted" has taken an unexpected turn in the Internet age. How can we privelege the statement, "Ithaca Hours are commonly accepted in the Ithaca community" over "Bitcoins are commonly accepted in the Bitcoin community"? (Note that many bitcoiners are willing to accept bitcoins as payment for anything they own or any service they can provide, so although it may be true that you can't buy everything you need from other bitcoiners, this seems to be a matter of trade infrastructure (ebay-style sites, etc.) having yet to mature in order to facilitate trade among the estimated tens of thousands of users.) Either way, I still must ask how we can privelege the statement "You can buy any drug with bitcoins" over "You can buy almost anything with Ithaca Hours in Ithaca"?

The Internet has simply taken the importance of physical location out of the picture for many transactions, especially for services. This seems to throw a monkey wrench into the analysis from a classical point of view.

Aside from that, if bitcoins are persistently useful for trading any class of goods and services, and they have been for a while now (drugs and international wire transfers), the only question seems to be how far they will spread. Those skeptical of p2p ledger systems like Bitcoin need to give reasons why they cannot later come to be useful for trading other goods and services. Why must they remain limited to drugs and wire transfers (and webhosting services, programming services, design services, etc...)?

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Dusty replied on Sat, Oct 6 2012 2:56 AM

But that's only true by virtue of government interference! There is nothing stopping gold/cash/etc. from being wired anywhere in the world using exactly the same protocol as Bitcoin itself.

So why it is that it is not possible yet, while bitcoin is already now, all over the world?

You see the difference?

No, it really doesn't. You can transfer digital token claims to the same physical backing without having to move the physical backing an angstrom. It just sits there while people exchange the digital token claim to it.

Those digital tokens you are speaking about must reside to some centralized entity that allow you to exchange them. Until it decides it will not for some reasons, like happened for example to wikileaks.

With bitcoins there is no central authority and nobody in the world can stop you to make a transaction to someone else.

You see the difference?

Also, a central entity like goldmoney ask for tons of papers (it took two weeks for me to being enabled), while I can start using bitcoins in 0 seconds, withoud asking anyone for permission.

You see the difference?

Now, someone does have to pay for the secure storage of that physical backing. But that's the whole point of backing a digital currency...

With gold I have to pay for the secure storage, with Bitcoin I do not.

You see the difference?

BTC could drop to $0.000000000000000001 overnight.

Yes it could, but why it should? As more and more people uses it, less likely that could happen [I'm sorry for my awful English, I'm not a native speaker, please forgive me]

Have you ever heard of a numbered bank account?

Yes, I have, they were in Switzerland and they are no more, AFICT.

And have you ever tried to open one of those account? Do you know how much time and money it costs to open and use it?

Again, compare it with opening an "account" with Bitcoin: zero time and zero cost.

You see the difference?

So, while the risk is there, there is also the fact that with Bitcoin I can do things that I can't do in *any* other way, right now, in all over the world, so in the end it's a balance between risk and features.

Bitcoin is a product of the free market because it fullfeeds strong needs, and those needs are becoming more and more stringent due to the more and more government interventions in the economics.

Since all government seems to be heading all in the same direction, I don't see Bitcoin going away anytime soon, quite the contrary.

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Clayton:

Not in Austrian monetary theory. How many times do we have to go around this?

You are in error. Read Menger's On The Origins of Money if you do not believe me. Menger describes much better than Mises what factors influence demand for a medium of exchange and how to detect whether goods are liquid (or "saleable").

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Clayton:

So, if a) Bitcoins are imposed on the developed world by government and then b) the developed world implodes on itself and regresses to the dark ages, then you could have an unbacked, extremely low-value currency continuing in use despite the absence of government enforcement. But wait, in order to have Bitcoins, you need a power grid and computers. So, sorry, there's no way you can have Bitcoins without government creating the demand either by direct imposition or through other means.

Once again, the "backing" plays no role once a medium of exchange has sufficient liquidity. The function of medium of exchange sustains itself through the network effect. The purpose of the regression theorem is to explain how it gets to the point where the network effect is self-sustainable (i.e. reaches critical mass).

Furthermore, your argument is exactly the opposite of the actual demand: the stronger the state interferes with markets, the higher the transaction costs of fiat will be. Cryptocurrencies are affected by regulation disproportionately less than fiat. So the difference in transaction costs of fiat and something like Bitcoin would rise, and people would be more, not less, motivated, to use Bitcoin.

Somali schillings have low value not because the government can't enforce their use, but because they had a small value before in the first place, and after the legal tender laws were abolished, there was no way to prevent counterfeiting, so the supply rose. With Bitcoin, neither of those factors are present.

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Smiling Dave:

Bitcoin widely used implies there is no free market at work, by Mises regression theorem, which states that in a free market bitcoin will never ever be widely used.

The regression theorem states no such thing.

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Clayton:

That is not Austrian monetary theory - people choose their medium of exchange on the basis of its suitability for exchange

Suitability for exchange = transaction costs. See Menger in Principles of Economics and On The Origin of Money.

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Clayton:

The market cap of Bitcoin is infinitesimal. The number of people using it is immaterial. When Gramma Marge puts her husband's life-insurance windfall into Bitcoin Bank, then I'll agree that BTC is money. In the meantime, it's a lot of mental masturbation.

Yet, the acceptance keeps growing, and is motivated by rational choice, since people can lower their transaction costs by using Bitcoin. I understand that your misrepresentation of Mises leads to to denial though. Are you going to deny that the use of Bitcoin can lower transaction costs too?

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Smiling Dave:
Within the gambling establishments in Las Vegas you may be able to buy a drink with poker chips. But that does not make poker chips generally accepted, and it does not make them money.

Poker chips are at best a wannabe money substitute, they are not money in the narrower sense, since they are pegged to another money and are not subject to a distinct appraisal process.

Smiling Dave:
When Rothbard wrote "no one" he meant "at best a trivial amount".

I wonder what you'll do when the number of people using Bitcoin exceeds the number of inhabitants of small countries. Now it's already estimated at 500k-1m and it's growing. And the more it grows, the higher the liquidity and the better the opportunity to lower one's transaction costs by using Bitcoin.

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Clayton replied on Sat, Oct 6 2012 3:42 AM

See Menger in Principles of Economics and On The Origin of Money.

Can you narrow it down for me? I haven't read it and have no idea what portion you're referring to.

Unbacked currencies will die out in a free market for the simple reason that a backed currency is always preferable - it's the same reason that the consumer will always choose higher quality goods over lower quality goods at the same price. A backed currency can do everything an unbacked currency can (except possibly greater anonymity) with the added advantage of much lower risk.

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Clayton:
But that's only true by virtue of government interference! There is nothing stopping gold/cash/etc. from being wired anywhere in the world using exactly the same protocol as Bitcoin itself.

You are mistaken. If the transaction costs of monetary base (Bitcoin) are sufficiently low, a system with money substitutes cannot compete on transaction costs, as there are costs associated with management of the monetary base (storage and redemption), even in the absence of the state. As I wrote before, adding backing to Bitcoin would increase transaction costs thereof, and would lead to its collapse.

Clayton:
No, it really doesn't. You can transfer digital token claims to the same physical backing without having to move the physical backing an angstrom. It just sits there while people exchange the digital token claim to it.

Yes, and while it's sitting, it causing costs to the issuer. These need to be offset somehow. So Bitcoin wins again.

Clayton:
Now, someone does have to pay for the secure storage of that physical backing. But that's the whole point of backing a digital currency... It's backed by something valuable enough that it needs to be locked up. The cost savings is that the currency is no longer solely backed by confidence.

You admit yourself that there are costs associated with money substitutes. So what you propose cannot beat Bitcoin on transaction costs.
 
There is also one more bonus, without money substitues, credit expansion is impossible. With money substitutes, you'll end up with credit expansion and the credit cycle. I'm not sure to what extent that plays a role in the decision making process of media of exchange directly, but it's a nice thing to have.

Clayton:
This risk-discrepancy is what's being completely overlooked here. BTC is wholly speculative in a way that gold or silver are not. Sure, buying gold and silver is a form of speculation on the margins. You're not betting that gold won't be $0 when you wake up tomorrow because there's just no way it can be $0 tomorrow.

Since Bitcoin has no meaningful competition (fiat/gold have too high technological transaction costs, and other cryptocurrencies have lower liquidity), there is no rational reason for BTC to collapse, as the users of Bitcoin do not have any alternative to switch to.

Clayton:
Note that even when bank certificates were the state of the art in money substitutes, no one ever used an unbacked paper certificate except as a consequence of some government chicanery.

Wrong again, Clayton. Liquidity can outperform the lack of "backing", and as long as there is a demand for money substitues (i.e. as long as the transaction costs of the "backing" are too high), they prevent the emergence of a commodity money if fiat already exists.

Clayton:
A digital token is a digital token. BTC has no special claim on being a digital token. So gold-banknote:unbacked-paper is precisely logically equivalent to digital-gold-currency-token:Bitcoin. Only an insane person would choose to be paid in unbacked digital tokens over backed digital tokens.

Again, people choose their media of exchange based on transaction costs, not on "backing".
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Clayton replied on Sat, Oct 6 2012 3:46 AM

distinct appraisal process.

Wha? I guess this is another gem supposedly buried in Menger somewhere...

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Dusty replied on Sat, Oct 6 2012 4:08 AM

A backed currency can do everything an unbacked currency can (except possibly greater anonymity)

Except that storage is expensive for traditional backed currencies.

Except that confiscation is possible for traditional backed currencies.

Except that transaction between people requires a third party that may have political reasons for not allowing it for traditional backed currencies.

Except that opening an account it's a tedious work, and this too is subject to the will of others for traditional backed currencies.

Except that a currency backed by gold, due to great technological advance, maybe in a distant future could be synthesized.

Except that for traditional backed currencies having to rely on third parties for storing and transacting opens the door to fractional banking and we have to trust them not to (or trust the auditors)

Except that unlike traditional backed currencies a new business can start and sell good and/or services without requiring approval from anyone.

You don't have a clue what Bitcoin is all about, isn't?

I suppose that when you realise that with Bitcoin you can do a *lot* of things impossible to do in any other way you could begin to accept the fact that more and more people are beginning to use it.

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Clayton:
Can you narrow it down for me? I haven't read it and have no idea what portion you're referring to.

It's a relatively short book. Unfortunately I don't have good quotes from it, you might need to read Principles of Economics as well.

Clayton:
Unbacked currencies will die out in a free market for the simple reason that a backed currency is always preferable - it's the same reason that the consumer will always choose higher quality goods over lower quality goods at the same price. A backed currency can do everything an unbacked currency can (except possibly greater anonymity) with the added advantage of much lower risk.

As I already explained, this is neither supported by the Austrian school, nor by empirical evidence, nor by Bitcoin. Backing is merely one of the factors influencing the transaction costs (trust of money substitutes). But it's not the only one. Normally, liquidity beats all other factors.

The reason for the apparent confusion of choosing "worse" goods is the network effect (of what liquidity is an example). Network effect affects the value of goods, so it influences the choice. That's why gold can't outcompete fiat as a medium of exchange even after legal tender laws are abolished, the network effect poses a high obstacle. That's also why people don't switch to, say, esperanto even though linguistically it might be superiour than english.

But the network effect is also not the only factor. Hyperinflation can cause a switch. Technological progress can cause a switch.

And network effect also works for Bitcoin. Network effect gives the first mover a competitive advantage, so other cryptocurrencies have a difficulty of catching up.

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Since I'm feeling generous, I'll respond to the gist of your post. You say that as we speak bitcoin is being used, by some people at least, as a medium of exchange. No. There is not a person on this planet who uses bitcoin for even 1% of his daily transactions. Nobody goes to the grocery store, or any other store, with a shopping list and a fistful fo bitcoins. Nobody will agree to be paid his salary in bitcoins. Nobody can look in his fridge, or any other largish area of his house, and see it filled with things bitcoins have bought him. In other words, even to the trivial amount of people who have had any interaction whatsoever with bitcoin, it was not as a medium of exchange, meaning something he knows he will go shopping with for most of what he needs.

Completely wrong.  You are conflating the terms 'medium of exchange' and 'money'.  They do not mean the same thing.  A medium of exchange is any commodity obtained for use in exchange for another good.  The term money refers to a generally used medium of exchange.  A commodity can be called a medium of exchange even if it is only used as such once.

Rothbard demonstrates the difference in this passage (MES pp. 192-193):

'A commodity that comes into general use as a medium of exchange
is defined as being a money. It is evident that, whereas
the concept of a “medium of exchange” is a precise one, and
indirect exchange can be distinctly separated from direct exchange,
the concept of “money” is a less precise one. The point at which a medium of exchange comes into “common” or “general” use is not strictly definable, and whether or not a medium
is a money can be decided only by historical inquiry and the
judgment of the historian.'

It is clear from this passage that the term 'medium of exchange' has nothing whatsoever to do with the extent it is used, since it would be ridiculous for Rothbard to talk about a medium of exchange coming into common or general use if it had to be such by definition.  Bitcoin, therefore, is undoubtedly a medium of exchange.

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Clayton:

distinct appraisal process.

Wha? I guess this is another gem supposedly buried in Menger somewhere...

Actually I think this one is Mises or Rothbard or Salerno, when they analyse the money supply, but I can't find the quote now.

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And by the way, the best refutation of the "if people are free to choose, they choose commodity money" mistake is international trade. In international trade, people are free to choose what to use as a medium of exchange. And what do they use? They do not use commodity money. They use fiat money, with heavy leaning towards those that are the most liquid (e.g. the dollar, euro, pound sterling). Even though changing, say, the Czech crown to Thai baht directly is only one step and changing the crown to usd and used to baht are two, since the liquidity of usd is much stronger, the overall transaction costs are lower with the roundabout exchange.

I might get crucified for mentioning it, but Paul Krugman wrote two papers about the choice of media of exchange in international trade. He uses the term "friction" instead of transaction costs, but he gets right that in normal circumstances, liquidity beats all other factors. He wrote it in the 80s, before he switched to faking alien landings.

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1. Ithaca Hours have been discussed here: http://mises.org/community/forums/p/25387/429154.aspx#429154

That link is of historical interest, as it shows that Smiling Dave is just like the rest of us, meaning not born knowing everything straight out of the box. He, too, had to learn. He, too, at one time did not grasp the finer points of Mises' Regression Theorem.

2. The bitcoin is an entirely new animal fallacy has been addresed many times. I'll paraphrase what I wrote here:

Let us think back to high school. What was the most difficult course there? Even those who are adept at math might say they had the hardest time with high school geometry.

And what was so hard about it? For one thing, you could not toss together a string of buzzwords and get a passing grade. Faced with a proposition, you had to actually prove it, step by step, justifying each step with support.

The proof had to obey the strict rules of logic, too. You could not say Pythagoras was wrong because he is long dead, hopelessly outdated, a member of the bourgeoisie, did not have an internet connection, or is an entirely new animal. That didn’t cut it. You had to address the idea, not the man.

And when you addressed the idea, you had to show exactly why the idea is wrong. At what line of a proof is there a mistake, and what is the mistake, exactly? 

Many people had no clue in high school geometry. They, of course, will also have no clue about AE and bitcoin arguments, because the structure of AE and of a bitcoin argument is similar to that of geometry. It is composed of statements backed up by step by step logical proofs.

Even those who excelled in geometry often found that the kind of thinking that went on in geometry class was never used in the real world, as seen on TV. No politician, for example, ever discusses an issue using logic. Instead they use every kind of argument that would have guaranteed them an F in geometry class. I imagine many college courses work the same way. One learns that tossing together buzzwords will earn one respect, and that actually thinking things through earns one failure, if one reaches conclusions disliked by the teacher.

Thus, the role model of proper thinking, seen only in geometry class, was drowned out by a flood of role models that did not use logical thinking. Pretty sad, pretty pathetic, but pretty common.

So guys, I welcome all comments. But don’t be surprised if my reply will be that you please show me exactly where the flaw lies in my thinking, and why it is a flaw. No more of this “Mises is dead and did not have an internet connection, so he must be wrong” stuff. Get used to logical thinking. Be liberated.

Summing it all up, if you want to show why Mises Regression Theorem does not apply to bitcoin becasue it is a "new animal", do the adult thing. Summarize your understanding of the theorem. This is an important step, universally used in serious discussions. If you get it right, we can then take the rest of your argument seriously. If you get it wrong, we can mock you.

Next, summarize the proof of the theorem. Number the steps of the theorem, so we can grasp what you will do in the final step, to wit;

Show which line exactly of the proof is wrong because "bitcoin is a new animal". Also, explain clearly why that line is wrong.

Guys, this is basic rational thinking. It is the gift of the Western World to humanity. It goes on every day in serious dicussions.

One example. Note that every single time, without exception, when Mises in HA or any of his other writings dismisses a competing theory, he always states it, sums up all the arguments in its favor, and then shows why it is wrong.

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It is clear from this passage that the term 'medium of exchange' has nothing whatsoever to do with the extent it is used,...

Technically, I stand corrected. Indeed, the way Rothbard uses the term, if even one transaction is made where A wants butter, say, not to eat it, but to trade further with it, then butter is a medium of exchange in that one transaction.

But with that use of the phrase, then of course bitcoin being a medium of exchange proves nothing whatsoever about its chances of becoming money.

After all, if Tony the Dunce and Charlie the Retard once used soiled facial tissue that Tony blew his nose into as a medium of exchange, that places soiled paper tissue on an equal footing with bitcoin.Both are media of exchange. But I doubt that the bitcoin lovers will come out so passionately in favor of soiled paper tissue as being the wave of the future as they do for bitcoins, waving about the fact that it is a medium of exchange between Tony and Charlie.

What's important is what Rothbard mentions a little before the bit you quoted, a medium of exchange in common use, which is what I meant. As it gets commoner and commoner, it may slide into being considered in general use. If it is not even of common use, it has no chance of ever being money.

Here's are some quotes from Mises that may be of interest.

 Money is the universally used
medium of exchange, nothing else. Only because money is the com-
mon medium of exchange, because most goods and services can be
sold and bought on the market against money...

A medium of exchange which is commonly used as such is called
money. T h e notion of money is vague, as its definition refers to the
vague term "commonly used." There are borderline cases in which
it cannot be decided whether a medium of exchange is or is not "com-
monly-" used and should be called money. But this vagueness in the
denotation of money in no way affects the exactitude and precision
required by praxeological theory. For all that is to be predicated of
money is valid for every medium of exchange. I t is therefore im-
material whether one prescrves the traditional term theory of money
or substitutes for it another term. The theory of money was and is
always the theory of indirect exchangc and of the media of exchange...

History may tell us where and when for the first time media of exchange
came into use and how, subsequently, the range of goods employed for this
purpose was more and more restricted. As the differentiation between the
broader notion of a medium of exchange and the narrower notion of
money is not sharp, but gradual, no agreement can be reached about the
historical transition from simple media of exchange to money. This is a
matter of historical understanding. But, as has been mentioned, the distinc-
tion between direct exchange and indirect exchange is sharp and every-
thing that catallactics establishes with regard to media of exchange refers
categorially to all goods which are demanded and acquired as such media.



 

 

 


 

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Smiling Dave,

you just refuted your own former claims. By quoting Mises on saying that money is a common medium of exchange, it is necessary that uncommon media of exchange exist too. Media of exchange that are not money exist, and some of them are also more liquid than others. Human Action in section about secondary media of exchange elaborates on it a bit more.

You just showed that you have no idea what you're talking about. You're randomly mixing several things, you have not formulated the regression theorem yourself and you tend to avoid confronting other people's arguments. And then you have the audacity to imply that your opponents do not use logic?

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Anenome replied on Sat, Oct 6 2012 11:14 AM

Then there's only one rational way to look at bitcoin, SD.

Bitcoin is money to those whom use it as a medium of exchange and not money to those whom don't.

That avoids the question of 'how many people need to use it before it's money.' Anything serving as a medium of exchange is being praxeologically used as money by that group.

Thus, bitcoin is money. Just not a money in widespread use. Yet.

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Malachi replied on Sat, Oct 6 2012 11:18 AM
Stand by for dave to insult those people and post a link to his blog.
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AJ replied on Sat, Oct 6 2012 12:22 PM

Smiling Dave:
Summing it all up, if you want to show why Mises Regression Theorem does not apply to bitcoin becasue it is a "new animal", do the adult thing. Summarize your understanding of the theorem. This is an important step, universally used in serious discussions. If you get it right, we can then take the rest of your argument seriously. If you get it wrong, we can mock you.

If we are to proceed rigorously, it doesn't matter whose theorem it is. Mises's didn't give a presentation that is clean and rigorous in the ways I want it to be, and I don't consider it a serious objection in that form, so I will give my own theorem:

Something can only be valued for exchange purposes by a group of people if it was valued for non-exchange purposes by at least one person P before that, because if no one ever valued it for non-exchange purposes, no other person Q would accept it in exchange. The only reason Q would accept it is because they know someone else (P, at least) values it and hence might accept it in exchange for something Q wants.

The minimal case is then, for example, that Grandma Koto - a baker - is the only person who values the item for non-exchange purposes. As soon as Q knows this, he may start to accept the item for the exchange value it gives him with Grandma Koto. For example, Q may know he will want to obtain bread in subsequent weeks, and he knows Grandma Koto will give him bread in exchange for the item. To everyone who wants Grandma Koto's bread, the item now potentially has value for exchange purposes. It also potentially has value for exchanging with anyone who wants her bread, and anyone who transacts with anyone who wants her bread, etc. (the network effect).

So the million-dollar question here is has anyone ever valued bitcoins for non-exchange purposes? Of course. I can virtually guarantee that at least one person thought it would be cool to have bitcoins, for sentimental value, hacker cred, or whatever. Done.

This is why I just don't think the regression theorem is a serious objection. If you want to make it up to be this rigorous mathematical thing, you can't hold to a strict interpretation of "industrial value." If your definition is strict enough to exclude valuing bitcoins for sentimental reasons, the proof fails: it is obvious that even if only Grandma Koto persistently likes bitcoins strongly for sentimental reasons, other people may start accepting bitcoins because they love Grandma Koto's bread, then other people may start accepting bitcoins because they want to trade with those people, etc. 

Live by the rigor, die by the rigor. 

And that really underscores what I find so unconvincing about the Regression Theorem objection: it is presented as a "theorem" with all the mathematics-like precision and logical rigor that should entail, but then all the terms get muddled up at the arguer's own convenience.

It's so easy to equivocate on "industrial value" so that it simply means any non-exchange value when we are checking that the proof is rigorous, but then gets switcheroo'd to what it actually sounds like: not any non-exchange value, but only classical production and consumption value. And if we get to that stage the same trick can be pulled by equivocating again, this time on "consumption value," where sentimental value (for example) is counted as consumption value when talking about how the proof is rigorous, but then not counted as consumption value when talking about bitcoins.

Then there is fuzziness when talking about how many people constitute a group large enough to matter or what "commonly accepted" means, and none of that is informed by the regression theorem or any rigor it may have. Once we are having that debate, the "rigor" or "theorem" card certainly cannot be played as backup since it is just an argument about the interpretation of the premises. Additional fun can be had by equivocating between "medium of exchange" and "commonly accepted medium of exchange" as is convenient. 

To recap, the regression theorem argument dies the moment you point to a single person who really does value bitcoins (for any reason!). Here are a whole bunch. From there, if you want to go full-rigor, you have to allow for super-network effects (and this isn't too amazing since we have a new super-networking thing called the Internet). The moment you call it a nerd clique, you can no longer claim that statement under the umbrella of any Regression Theorem-based rigor. But even that cat is already out of the bag, because whole scadloads of people already do accept bitcoins. The moment you object that it's just a bubble, you can no longer claim that statement under the umbrella of any Regression Theorem-based rigor either.

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Esuric replied on Sat, Oct 6 2012 12:30 PM

It's shocking how many people still don't understand what money is and what money is not. 

"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."

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It's shocking how many people still don't understand what money is and what money is not.

Esuric, we may have diagreed on things, but I ceratinly agree with that one.

Replies to evryone on the way, fear not, guys.

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Malachi replied on Sat, Oct 6 2012 1:42 PM
Replies to evryone on the way, fear not, guys.
Dave, your eagerness to participate in the discussion is never in doubt. Your willingness to contribute to the discussion, is however quite dubious. I would rather have a bitcoin, fleeting as they may be.
Keep the faith, Strannix. -Casey Ryback, Under Siege (Steven Seagal)
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AJ,

1. To wipe away with one swoop all your objections about vagueness and equivocation as far as values of an object, read on.

The uses of an object can be split into two mutually exclusive, but together all encompassing, categories, A and B. A is the use one gets from passing it on to the next guy, aka use as a medium of exchange. B is every other use, whether sentimental value, industrial use, anything that will make a person want to hang onto the object and not pass it on. That's why I prefer using the phrase "intrinsic value" for B instead of all the other slightly misleading ones like industrial value.

Mises proves, step by step, that an object cannot ever have use A alone. Use A will only latch onto an object that already has use B. A careful reading of his proof will make clear that he never confuses A with B, as you erroneously claim.

2. Your next argument is that if one lone isolated person in the whole universe values something for any reason whatsoever, then it can become money. If Charlie the Retard values some generic useless rag because it comforts his troubled mind, even though we are talking about rags that mean nothing at all to anyone else in the world and they would never pay a single penny for any quantity of them, then useless rags may someday become money. The regression theorem does not contradict this, you claim, because use B by a single individual is enough for use A to attach to it.

Again, that's true. [Note: I'm being sarcastic]. Millions of people around the world may now hang on to those rags because they can use them to trade with Charlie the Retard, since he needs those rags. Actually all he needs is one, and he may already have one, but still, all rags have now gone up in exchange value by an amount that is non-negative, but extremely close to zero. 

Same thing with bitcoins. If one person feels cool because he has a bitcoin, then the value of every single bitcoin to every single person on the planet has now gone up, because maybe one of the millions will someday get a chance to trade that bitcoin with Charlie the Nerd. He already has one, maybe he might want two. Such a possibility certainly makes every bitcoin worth $33, or at least $5, right? Wrong.

You see where I'm going with this. We are talking about the possibility of bitcoin becoming money, meaning universally accepted, commonly accepted, generally accepted as a medium of exchange. Mises proves that this can only happen when almost all people will think "Oh boy! A bitcoin! I can sure use one of those to trade with. So many people want bitcoin not to pass on to the next guy, but to hold onto and keep for themselves forever, just like Charlie the Nerd, that I will have no problem at all disposing of it. " For this to happen, bitcoin will have to be in great demand for its intrinsic value. But bitcoin has no intrinsic value to everyone except Charlie the Nerd. The world will never become a vast army of Charlie the Nerds; thus bitcoin will never become money.

Let me explain where your error lies. Say you open a math book and read a theorem that says every even number is the sum of two primes. You scoff at the book and say "I have some slabs of prime beef here and no even number is the sum of prime slabs of beef. Numbers are intangible objects". I hope the mistake is obvious here. Before you can grasp what the theorem is saying about primes, you have to know what the book means when it uses the word prime. 

Similarly, you have to grasp what the Regression theorem is talking about before you can understand it, or presume to agree or disagree with it. It is talking about money. Furthermore, it is talking not about your personal definition of money [an amusing and absurd ruse used by some to get around the regression theorem, redefining money as they see fit], but about the defintion of money as used by economists the world over [not just Austrians]. 

Money is a universally accepted medium of exchange. That's what Mises is talking about. And he is asking how did it ever get that way? How did it ever get so much use A that it started getting a significant value because of the use A that it has? [After all, value comes from demand. To get even a small non zero value to everyone in an economy, you need great demand for the object in that economy. We are talking about something that is Universally Accepted, remember? The definitions, keep your eye on the definitions]. And his answer is that it can only get a significant value as A because it had plenty of use B first by many many people. If you told him that it got use A value to almost everyone in an economy because only one Charlie the Nerd wanted one bitcoin, he would, being more polite than me, not express his scorn openly. 

 

 

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Another grave error by Smiling Dave:

Smiling Dave:
Mises proves, step by step, that an object cannot ever have use A alone.

Wrong. This is what he writes in Theory of Money and Credit:

Mises:
In the case of money, subjective use-value and subjective exchange value coincide. Both are derived from objective exchange value, for money has no utility other than that arising from the possibility of obtaining other economic goods in exchange for it.

Also, Rothbard affirms that once liquidity is sufficient (i.e. critical mass of the network effect is reached), the function of a medium of exchange is self-sustaining:

Rothbard:
On the other hand, it does not follow from this analysis that if an extant money were to lose its direct uses, it could no longer be used as money. Thus, if gold, after being established as money, were suddenly to lose its value in ornaments or industrial uses, it would not necessarily lose its character as a money. Once a medium of exchange has been established as a money, money prices continue to be set. If on day X gold loses its direct uses, there will still be previously existing money prices that had been established on day X – 1, and these prices form the basis for the marginal utility of gold on day X. Similarly, the money prices thereby determined on day X form the basis for the marginal utility of money on day X + 1. From X on, gold could be demanded for its exchange value alone, and not at all for its direct use. Therefore, while it is absolutely necessary that a money originate as a commodity with direct uses, it is not absolutely necessary that the direct uses continue after the money has been established.

Rothbard affirms that the point of the regression theorem is to explain how the market price and liquidity are established. He made a couple of other problematic remarks (e.g. he thinks that for this critical mass, it is necessary that the medium of exchange is money first, and that this cannot happen without other uses), but he clearly refutes Smiling Dave's nonsense.

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But with that use of the phrase, then of course bitcoin being a medium of exchange proves nothing whatsoever about its chances of becoming money.

Yes, but by the same token there is nothing a priori which says that it cannot become money, since we have already said that it is a medium of exchange.  Do you agree?

If it is not even of common use, it has no chance of ever being money.

Again, you are using words incorrectly (or by your own definition, in which case you should demonstrate how that is different to that of the Austrians).  Look at the Rothbard quote I already posted (or indeed the Mises quote that you just posted!):

"A commodity that comes into general use as a medium of exchange
is defined as being a money."

Two sentences later he uses 'general use' and 'common use' as synonyms.  It's therefore ridiculous for you to say what you have, since for it to be in common use is indeed for it to be money!!  It is also ludicrous on the face of it, because it would mean that nothing could become money, since for a medium of exchange to become money it would have to, according to you, begin life in common use!!

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Pete,

Yes, I was imprecise. The correct statement is "Mises proves, step by step, that an object cannot ever begin with use A alone".

Which is all that's needed to doom bitcoin.

 

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No Smiling Dave,

you can't wiggle out of your contradictions anymore.

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Yes, but by the same token there is nothing a priori which says that it cannot become money, since we have already said that it is a medium of exchange.  Do you agree?

Yes. The proof that it cannot ever become money stems from it not having intrinsic value.

Is anyone even bothering to read and/or understand the theorem?

Again, you are using words incorrectly...

The underlying idea is very simple. It is a question of degree, as Rothbard makes clear in the paragraphs preceding the one you quoted.

The way it works is this. At some point, some object becomes very popular, meaning in great demand, for its intrinsic uses. The next stage is that people start using it in many instances as a medium of exchange. This happens more and more often until, at some point that is not clearly defined, it is so widely used that it is called money.

 

 

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Smiling Dave:
Trust me, I've been through these arguments many many times.

I don't need to trust you on that point.  I know you have.  But a humble man is always open to the possibility that he may have been mistaken before.

I sense, however, that you have no dog in this race and want to know what's what.

Yes, I seek the truth.  Are you here for some other reason?  If you are only here to defend your dog (whatever that is), then there doesn't seem much point continuing the discussion.  What is this 'race' by the way, and what is your 'dog'?

I've summarized all I have to say on bitcoin in this article on my humble blog: http://smilingdavesblog.wordpress.com/2012/08/03/bitcoin-all-in-one-place/ The comments on the articles are also informative for the most part.

I have read your blog posts.  You may want to revise some of them in light of what you've learned in this thread.

Technically, I stand corrected. Indeed, the way Rothbard uses the term, if even one transaction is made where A wants butter, say, not to eat it, but to trade further with it, then butter is a medium of exchange in that one transaction.

But with that use of the phrase, then of course bitcoin being a medium of exchange proves nothing whatsoever about its chances of becoming money.

That is correct.

In light of your recognition that being a medium of exchange does not require being commonly accepted, your latest response to me doesn't make any sense, since in that response you were using a different definition of medium of exchange.  But now that's cleared up, I would like hear which part of the transition A -> B -> C -> D you think the regression theorem is about.  In other words, which part of the transition does the regression theorem, in your understanding, rule out for non-commodities?

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The proof that it cannot ever become money stems from it not having intrinsic value.

What do you mean by 'intrinsic value'?  The marketability of the medium of exchange?  Show me where either Mises or Rothbard say that a money must have 'intrinsic value'.

The word 'intrinsic' is used twice in Human Action:

P. 96: "Value is not intrinsic, it is not in things."

P. 203: "An inveterate fallacy asserted that things and services exchanged are of
equal value. Value was considered as objective, as an intrinsic quality
inherent in things and not merely as the expression of various people’s
eagerness to acquire them."

It is used exactly once in the entirety of Man, Economy, and State with Power and Market:

P. 44: "Where labor does
provide intrinsic satisfactions, the utility of the product yielded
will include the utility provided by the effort itself."

Is anyone even bothering to read and/or understand the theorem?

We all have, and do. It is you who is confused.

It is a question of degree, as Rothbard makes clear in the paragraphs preceding the one you quoted.

Show me exactly where he does this.  He talks about a good becoming more and more popular but he does not state that it can't begin life - in terms of being a medium of exchange - in one series of transactions.  He uses 'common' and 'general' as synonomous and in referring to money - as does Mises.  You have done nothing to clear up the claim that "If it is not even of common use, it has no chance of ever being money."  Do you stand by this claim or retract it?  Gold was not in common use anywhere in 5000 BCE.  Could it therefore not ever become money??

The way it works is this. At some point, some object becomes very popular, meaning in great demand, for its intrinsic uses. The next stage is that people start using it in many instances as a medium of exchange.

You have already granted that bitcoin is a medium of exchange, which means you do not need the first stage in order for this particular example of a medium of exchange to come about.  Agree?  Or is bitcoin in fact not a medium of exchange?  Or can media of exchange come about without having 'intrinsic value'?  If the latter is the case, how can a medium of exchange come about without intrinsic value, but at the same time that medium of exchange cannot become money?

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Pete,

Give it up. Really. There are no contradictions. You, on the other hand, have yet to do what AJ attempted, however feebly and incorrectly, mainly to summarize the theorem and summarize the proof, and then show exactly which line of the proof is wrong.

Oh, did I mention that when you summarize the theory and the proof it has to be to your opponent's satisfaction? You can't go about making up your own version of the theorem or the proof and tackle that. For some reason AJ forgot about that.

And I'm not making unreasonable demands here. It's standard operating procedure for serious discussion among people who seek the truth [as opposed to htose with an agenda].

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Smiling Dave,

I formulated the regression theorem to you, twice, and showed how Bitcoin adheres to it. You have not formulated the regression theorem, you have not show which part of my argument is wrong. You lose.

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Graham,

I didn't mean that I had a dog in the race [=an agenda, some hidden reason to stubbornly cling to a position regardless of truth or falsity]. I was hinting that many I have had the pleasure of encountering on bitcoin threads, do. How else to explain some of the curious posts they have made?

I might need to make some minor revision, to make sure that "medium of exchange" is replaced with "money". The thing is, the previous rounds of debate had the bitcoiners insisting that it was already a medium of exchange, and thus it refutes Mises by its very existence. Since, obviously Tony the Simple exchanging tissue paper one time with Charlie the Mentally Challenged proves nothing, I assumed they meant it was a thriving medium of exchange, one that was oh so close to actually being defined as money, with nothing standing in tis path.

The Regression Theorem talks about Money. It begins with asking how does something get any value as money, and he concludes that it can only happen if it starts off as a small time medium of exchange and grows from there, which, but for cases such as Tony the Simple, will require it  to have intrinsic value to a great many people, which bitcoin clearly lacks. [More on intrinsic value next post]. So the direct answer to your q is that the regression theorem is talking about step A itself.

 

 

 

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Aristipuss.

This post will be about intrinsic value. The next one will clear up all misunderstanding about common use etc.

 I elaborate upon the dual meaning of intrinsic value and its relevance to bitcoin [look away Malachi] right here: http://smilingdavesblog.wordpress.com/2012/07/08/bitcoin-and-intrinsic-value/

I quote chapter and verse of Mises using the phrase intrinsic value [with plenty of triumphant crowing on my part] right here: http://smilingdavesblog.wordpress.com/2011/12/21/was-mises-regression-theorem-a-mere-history-lesson/

To make Malachi happy, I will quote the relevant part of the latter article:

That’s what some silly folks are saying over at the mises.org forums. That the theorem only says what happened, not what must always happen. [Look at my article, Bitcoin Takes a Beating, for info about what the theorem says, complete with chapter and verse and Smiling Dave's exposition].

Let me enlighten them.

First, let’s appeal to authority, shall we. Here are a few respected Austrians talking about the Theorem, and what it claims. All emphases mine:

Rothbard: On the other hand, while money had to originate as a directly useful commodity, for example, gold, there is no reason, in the light of the regression theorem, why such direct uses must continue afterward for the commodity to be used as money. Once established as a money, gold or gold substitutes can lose or be deprived of their direct use function and still continue as money; for the historical reference to a previous day’s purchasing power will already have been established.*53 
Note he says HAD to originate, not historically did by accident.


Professor Shostak: The theorem shows that money must emerge as a commodity.

Tim Terrell: One of the consequences of the regression theorem is that money must arise from a commodity already in general use. If there is no nonmonetary use for the good, it will not develop the widespread demand that must precede its use as a medium of exchange. As Mises’s student Murray Rothbard wrote, money “cannot be created out of thin air by any sudden ‘social compact’ or edict of government.”[2] But once a good develops a monetary nature, it is there to stay. The nonmonetary uses are no longer necessary to maintain the good’s monetary value, because there is already a set of prices based on that good.

[Note to the bitcoin folks: Yes, money must first be "in general use" with "widespread demand". which bitcoin lacks. One Pete Sudra is on record as saying that a couple of guys at a small convention using bitcoins for a couple of days is enough to prove bitcoin is money. General use and widespread demand is more than you and your drinking buddies.]

And now, the coup de grace, Mises himself in Money and Credit:

The Necessity for a Value Independent of the Monetary Function
before an Object can serve as Money

 
If the objective exchange-value of money must always be linked
with a pre-existing market exchange-ratio between money and
other economic goods (since otherwise individuals would not be in a
position to estimate the value 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] and a confirmation of Menger’s hypothesis concerning the origin of the use of money.
 

This link with a pre-existing exchange-value is necessary not only
for commodity money, but equally for credit money and fiat money.’
No fiat money could ever come into existence if it did not satisfy this
condition
.
..

There you go. He mentions bitcoins explicitly. Of course, you guys know it’s a gag. Bitcoins didn’t exist in Mises lifetime. I inserted the piece in brackets tio show exactly where bitcoins fit into the scheme of things.

And guess what? Mises laid out the logic of the theorem here like it was an Aristotelean syllogysm. Impeccable logic. Apodictically certain.

One last minor note. Whenever I use the phrase “intrinsic value” over at the forums, some newbie will say sanctimoniously that nothing has intrinsic value, it’s all subjective as Mises taught me, bla bla. This has happened many times. Well Mises right here [where I underlined it for your benefit] used the phrase intrinsic value. Put that in your pipe and smoke it.

[The mentally challenged will be quick to point out that Mises did not say "intrinsic value", but "intrinsically valueless". Those with even a nodding acquaintance with elementary logic will understand how foolish such an objection is].

BTW, I see from the Tim Terrell quote that he, too, uses "medium of exchange"as I do/did, to mean more than just Tony the Simple using it once. So Graham, no need to change anything.

 

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I formulated the regression theorem to you, twice...

Must have missed it. Will you kindly provide the links to your two efforts?

You have not formulated the regression theorem.

I sure did, in my article [with apologies to Malachi] Bitcoin Takes a Beating

you have not show which part of my argument is wrong...

You have tried various arguments over the long discussions on this forum. I have tackled them all right here: http://smilingdavesblog.wordpress.com/2012/08/03/bitcoin-all-in-one-place/

 

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