That's all he is talking about in the section you quoted. But in the section I quoted he is talking about what I said he's talking about. You are trying to prove that a Superman comic does not talk about Superman by showing me a Batman comic.
Completely wrong. Can you not read? The very sentence is:
"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, and a confirmation of Menger’s hypothesis concerning the origin of the use of money."
He was saying that fiat money could not come about through general agreement, and he then explains how - despite the fact that it is worthless in itself - fiat money could nevertheless come about. That sentence and the next two paragraphs are closely linked on purpose.
That's what you get for not reading my blog. I have addressed this bit of ignorance right here: http://smilingdavesblog.wordpress.com/2011/12/was-mises-regression-theorem-a-mere.html
Again, incorrect. I was not arguing anything that you addressed in your blog post. I wasn't talking about what Mises argued with the regression theorem, I'm talking about what you are saying now.
To help you along even further, I will post tomorrow, God willing, clarifying the numbers game element of this topic. How much is enough, how much of what, why is that number what really counts, etc. All will be answered.
Where exactly did you clarify this? I did not see any such explanation or definite definition of 'money'. Do you disagree with Mises and Rothbard that the classification of a medium of exchange as 'money' is not clear-cut?
Moving on: You have said "money is based on intrinsic value, not trust and confidence." You fail to realise that money can rely on either of those things, and that the 'trust and confidence' relies merely on some link with 'intrinsic value'. The difficulties in explaining the emergence of money was due to an infinite regress: demand for money being based on its past exchange value, and that exchange value being based on its past demand, and that past demand being based on its past exchange value, and so on. How was this solved? By showing how the demand for goods most marketable for their direct use resulted in their use in exchange. Now one of the most important aspects of the theory is that the particular medium of exchange can remain money even if its link to the original, direct use commodity is completely severed. We have provided outlines of this aspect both from Mises and Rothbard. When you understand this, you realise that a money does not need value in itself, but rather that in order to come about, it needed to have a historical relation to a good already in demand (either for direct or exchange use). Now, assume for the moment that bitcoin is being used as a medium of exchange (which you in fact admitted above). Either this is for its own historical direct use, its link to a commodity for direct use, or its link to a commodity for exchange use. Some here have posited that bitcoin has cryptographical direct use. It is also the case that bitcoin can be used to facilitate employment of fiat currencies, thus its use is like that of gold-backed currencies in regard to the regression theorem.
There is a big question hovering over you. You are saying that the particular commodity that money is made of must have 'intrinsic value', and therefore an industrial use. How is it that most commodities used as money today do not have such intrinsic value but are nevertheless used as money? Because of their historical link. But this link no longer exists, and they therefore have no intrinsic value!! They can never be money, according to you. According to Mises and Rothbard, however, they can indeed be money due to their historical link which made them generally accepted. Mises only argued that money cannot come about by general agreement and that its origin relies on the demand of directly used goods, not that it cannot remain in common use even if it has no 'intrinsic value'. Is there any reason that the demand for bitcoin cannot be based off the demand for other moneys (since it facilitates the use of those moneys), which can then be easily traced back to a good directly used per the regression theorem? I have not seen you address this.
You are saying that the particular commodity that money is made of must have 'intrinsic value'...
No. A careful reading will teach you that it must have started off its career as a medium of exchange having intrinsic value. It can later lose this intrinsic value and still remaion a money, yes.
Bitcoin had, has, and will have, zero intrinsic value. Thus it can never start off a career as money. Thus it can never be a money at all, because you have to start somewhere, and it cannot.
Let me give you an example. To be a cop, you have to pass a physical. If you have been enough years on the force, they will value you for your experience and may give you a desk job, even though you are now a walking mound of blubber.
Does that mean that someone who was born obese, spent all his life obese, and plans to remain obese forever can get a job as a cop, just like the fat experienced sergeant? No it does not. I hope you understand why.
Same thing with money. Replace "pass a physical" with "has intrinsic value" and you will get the picture.
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It's easy to refute an argument if you first misrepresent it. William Keizer
A careful reading will teach you that it must have started off its career as a medium of exchange having intrinsic value.
Nope, logically it simply needs to be in demand for a reason other than its own exchange value, thus preventing the infinite regress (assuming intrinsic value = direct use value). Answer the question at the end of my last post.
Aristippus: A careful reading will teach you that it must have started off its career as a medium of exchange having intrinsic value. Nope, logically it simply needs to be in demand for a reason other than its own exchange value, thus preventing the infinite regress (assuming intrinsic value = direct use value).
Nope, logically it simply needs to be in demand for a reason other than its own exchange value, thus preventing the infinite regress (assuming intrinsic value = direct use value).
Yes, this. If we simply look at the facts today, we see in Bitcoin a medium of exchange. That much is a fact already. And we are asking how it gained value initially.
To argue that it can't become a medium of exchange because of X, Y, or Z misses the point entirely. It has exchange value today. That ship has sailed. The question of how it got value enough to serve as a medium of exchange is perhaps a question still open for scholarship.
Personally I think the best answer is that people desired them because they speculated on them, which turned out to be a well founded speculation.
And your point about the separation in time of a currency's use-value and exchange value is well taken. That would explain why the dollar still has value despite being printed on worthless paper. That indeed explains near all fiat currency, including the Somalian one that exists sans gov controls.
Bitcoin's speculation value still yet hasn't been eclipsed by its exchange value, since miners are still mining primarily to find new coin blocks, not for transaction fees. If Bitcoin successfully makes the transition into being financed by transaction fees, the the currency will have passed the final test and all will go well.
Aris,
I don't see what we are disagreeing about.
Please summarize your understanding of my position. Then I can get what you think is wrong about it.
I presum that the q at the end of your post you wish answered is "Is there any reason that the demand for bitcoin cannot be based off the demand for other moneys (since it facilitates the use of those moneys), which can then be easily traced back to a good directly used per the regression theorem?"
Ok, let me take it slow here. "Is there any reason that the demand for bitcoin cannot be based off the demand for other moneys..."
The problem there is the words "based off". What do they even mean? Maybe you mean that bitcoin, by facilitating the use of other moneys, creates a demand for itself as a money. If that's what you mean, then my answer is that of course not. Because bitcoin was never used to facilitate the use of other rmoneys. It was supposed to be the money. Once you get paid for something in bitcoin, you are on your own. Should the market for bitcoin die instantly you have no recourse to get any dollars. You have been paid in full in bitcoins, and so long, sucker.
Next. ..."which can then be easily traced back to a good directly used per the regression theorem?" I don't know what this means either. Maybe you mean that if we accept step one, [that bitcoin had value as a facilitator, and becomes demanded as one, so much so that people are walking around saying, "Where's my bitcoins? I need to send someone dollars."], then, like fiat currency after it loses connection to gold, it has no problem with the regression theorem, since it started off with a connection.
No to that also. There are four steps.
Step one, bitcoin is used as a mere facilitator. This of course never happened in the real world, and so all the other steps will not get off the ground, but let's pretend we are in an alternate universe, where it did happen.
Step two. Demand for bitcoin as a facilitator increases so much that bitcoins as facilitators that they in general use as facilitators, and there is widespread demand for them as facilitators. Just as there is widespread demand for envelopes to move physical checks from hand to hand, so there is widespread demand for bitcoins to move digital dollars from computer to computer. his has not happened either yet. There is no widespread demand for bitcoin for any use whatsoever, and it is not in general use for anything at all. Go out into the real world, say Walmarts, or some bar, or anywhere the masses gather, and find out how many of them have even heard of bitcoin, let alone use it. [HInt: In a sample of ten thousand, you wont need more than five fingers to keep tally. Not exactly widespread use]. But let us assume that we are in an alternate universe, where in addition to step one happening there, so has step two.
Step three. Bitcoins are so popular, in such incredible demand, that people start actually paying each other in bitcoins, because they know they can easily find someone who will give them anything they want for bitcoins. For example this has happened in prisons, where cigarettes are used as money, for this very reason. But like steps one and two, this has not happened to bitcoin either.
Those who accept payment in bitcoin do not do so because they know everyone is dying to get them some bitcoin. If they are drug dealers, they do it because they have no other way of selling to someone far away, and better to sell their surplus in exchange for some risky speculative whatever than just have it rot in the warehouse. In other words, some idiots will give you dollars for bitcoins for the time being, so hey, take advantage of them while you can. If they are not drug dealers they do it because they are foolish, or because it's a pastime for them, or other personal reasons not based on what anybody else thinks about bitcoins.
Step four: Bitcoins are no longer usable as facilitators for dollars, for some reason or other. But once they graduated to step 3, it doesn't matter. Like any fiat currency , they can happily keep on trucking.
In other words, if you are asking whether steps one and two are enough to get to step four, the answer is no, you need step 3 also.
SD,
What I was getting at is that the commodity from which a money arises does not necessarily need direct use value, but that it needs to have at least had an historical link to a commodity that was demanded for direct use, from which the exchange demand arose per the regression theorem. Now you said that "money is based on intrinsic value, not trust and confidence." You also said "the very first time something is used as a medium of exchange, be it gold or be it bitcoin, the exchange value of the thing [=how many apples you are willing to trade it for, how many oranges, how many dollars, if dollars exist] is determined by one thing only: the demand that exists for the non monetary use of the object." But that is not true. As you seem to agree in the last post, the demand for money B can be based on its ability to enhance the use of money A, e.g. in the case of paper substitutes for gold.
The broader point, however, is that until you can rule out all kinds of demands for bitcoin - whether for its own direct use, its link to a good for direct use, for a link to a good for indirect use, or even as a result of speculation, we cannot say that the regression theorem tells us anything about the future of bitcoin. If you can definitively rule out all of the options, and show that there cannot be any demand for bitcoin, then I am happy to agree with you that the regression theorem proves that bitcoin cannot be a money. Failing that, however, any statement that bitcoin cannot become money is a thymological rather than a praxeological argument. Moreover, the task itself seems a fairly difficult one due to the fact that people do indeed demand bitcoins.
What do they even mean? Maybe you mean that bitcoin, by facilitating the use of other moneys, creates a demand for itself as a money. If that's what you mean, then my answer is that of course not. Because bitcoin was never used to facilitate the use of other rmoneys.
I would like those with knowledge on how people use bitcoins to comment on this.
There are four steps.
Currently I see no reason to disagree with you on most of the rest of your post, but I think the question on the demand for bitcoins is still up in the air (see above).
Anenome,
So you're saying that the initial speculation created the possibility of stable transfer between bitcoin and already established currencies?
Decent, non-technical, sympathetic overview of the technical aspects of Bitcoin.
Clayton -
Ari: "So you're saying that the initial speculation created the possibility of stable transfer between bitcoin and already established currencies?"
Initial speculation explains why bitcoin has a non-zero value in the first place.
There's two steps to it:
1. It had to establish an initial value. This was taken care of by speculators who began mining and hoarding them, expecting the price to rise later. Thus initial demand was taken care of.
2. Once bitcoin had any nonzero price, it was possible to use it as a service for buying things--as a medium of exchange.
1 leads directly into 2, but as we've seen with fiat money, once its original reason for having a non-zero initial value is taken care of, it's existence as a medium of exchange is possible.
SD's entire argument is that step 1 for bitcoin can't happen, that there is no use, no reason to value bitcoin, and that this must hold for all future periods and therefore the price must inevitably collapse.
However, this isn't how currencies have tended to work. Even within the framework of the Regression theory, if there is some reason to value a thing then based on that value the thing can become a medium of exchange. And its exchange value from there becomes the supporter and stabilizer of its price, but it needed step 1 to get there.
That's actually a more general formulation of the Regression theory that includes Bitcoin. All you need to turn anything into a medium of exchange is an initial reason to value it separate from its exchange value. Whether that's because of industrial use, or any other reason.
Mises used commodity / industrial value because all previous currencies seemed to fit into that mold. But that's not really what you need. All you need is any reason to value a thing. It need not be commodity value, need not be industrial value, any value. Could be its beauty, its uniqueness, or in this case its value as an object of speculation.
Once you have any value, it's possible to use existing money to buy the thing valued, for anything with any quantifiable value will be purchaseable in any other currency. So people started buying bitcoin and using it in the transactions in which it has a competitive monetary advantage.
Bitcoin only has a major competitive monetary advantage in a few specific kinds of transactions. Thus you have Silk Road and international currency transfers where Bitcoin is either more anonymous than other currencies or less expensive.
I expect Bitcoin to continue to be the currency of choice in those kinds of transactions where it has an advantage. And, later down the road, we may find that its advantage as un uninflateable currency is what will cause it to be generally accepted.
We all know the US dollar can't keep up trillion dollar deficits forever. I did the math today, trillion dollar deficits should be something like 8% inflation. But we lost a lot of capital on paper in the '08 crash. Eventually the slack gets taken up but the deficit will likely continue. At that point, get ready for heavy inflation.
It's gonna suck. And Bitcoin will begin skyrocketing in value. Because if the US dollar begins crashing, not like there's any other national currency you can escape to. If Wall Street ever flees to Bitcoin, then the currencies of the world will be like lemmings off a cliff.
Imagine stocks on the NASDAQ and NYSE being valued in Bitcoins. That's a day I want to see :)
Bitcoin only has a major competitive monetary advantage in a few specific kinds of transactions. Thus you have Silk Road and international currency transfers where Bitcoin is either more anonymous than other currencies or less expensive. I expect Bitcoin to continue to be the currency of choice in those kinds of transactions where it has an advantage. And, later down the road, we may find that its advantage as un uninflateable currency is what will cause it to be generally accepted.
Yes, that's what I was thinking, and perhaps so too were the initial speculators who demanded bitcoins. Good post.
I have no idea what the future holds for bitcoin - whether rising popularity, stagnation, or collapse - but as yet I see nothing a priori that means it cannot ever be considered money.
Anenome:That's actually a more general formulation of the Regression theory that includes Bitcoin. All you need to turn anything into a medium of exchange is an initial reason to value it separate from its exchange value. Whether that's because of industrial use, or any other reason. Mises used commodity / industrial value because all previous currencies seemed to fit into that mold. But that's not really what you need. All you need is any reason to value a thing. It need not be commodity value, need not be industrial value, any value. Could be its beauty, its uniqueness, or in this case its value as an object of speculation. Once you have any value, it's possible to use existing money to buy the thing valued, for anything with any quantifiable value will be purchaseable in any other currency. So people started buying bitcoin and using it in the transactions in which it has a competitive monetary advantage. Bitcoin only has a major competitive monetary advantage in a few specific kinds of transactions. Thus you have Silk Road and international currency transfers where Bitcoin is either more anonymous than other currencies or less expensive. This is an interesting idea. In yesterday's Economic Policy Journal podcast, Robert Wenzel interviews Bitcoin advocate Trace Mayer (who makes some LTV-based errors in trying to defend Bitcoin versus the regression theorem but otherwise makes good points). In the interview, Robert Wenzel says that the essence of the regression theorem is that you can't get some guy to accept something as payment unless you can convince him he can easily "lay it off" on some other guy. This is an apt thymological observation on Wenzel's part. The keyword here is "easily." It is actually pretty easy to lay bitcoins off on someone else, because you can sell them on Mt. Gox or another exchange. But it is true that it is not easy to lay them off on some random merchant down the street, at least compared with gold coins. We are now talking about thymological judgments rather than apodictic theorems, and judgments involve weighing various aspects. What bitcoins lack in ease of laying off on someone down the street, they perhaps make up for in ease and speed and cheapness of transmission to anyone in the world. The Internet facilitates finding such people and communicating and transacting with them. As more people start to accept bitcoins and more payment infrastructure (escrow, BTC-to-national-currency exchanges, Bitcoin debit cards, POS systems, eBay-like sites, etc.) comes online and matures, the ease of laying them off will increase. If Bitcoin continues its growth trend, the usage loop will close for more and more people, where they both make significant amounts of their income in bitcoins and turn around and spend it in bitcoins rather than "cashing out" (this seems to already be the case for some Silk Road users who sell one drug they can make or procure and use the proceeds to buy other drugs they don't have access to). Today's article in Scientific American covers many of these market growth issues excellently: http://www.scientificamerican.com/article.cfm?id=3-years-in-bitcoin-digital-money-gains-momentum Here is an older article, but it gives an interesting take on what Bitcoin is and the potential it has to disrupt the Establishment. Why anarchy fails | Post Points: 5
Why anarchy fails
I see nothing a priori that means it cannot ever be considered money
In the present order or do you mean even sans government interference in money? The reason I ask is that the Bitcoin fanatics keep asserting that Bitcoin would be viable and would naturally arise in an unhampered market in money production.
Well if we assume that bitcoin's in demand for some reason then we cannot say a priori that it cannot be used as money. That would depend on its own marketability and the marketability of its competitors.
Your question is a thymological one which I can't say I can answer with any confidence. But I would still guess that bitcoin would be much more likely to grow in popularity under the current order than in a free market.
I think you're stating the case too weakly. Banknotes were bearer titles to property (money) and functioned as money-substitutes. Digital tokens - which is what Bitcoins really are - could also function as money-substitutes. We can state praxeologically that no one would ever take payment in an unbacked paper banknote (title to nothing) in preference to a backed banknote (title to property). So why can't we state the same thing for a digital banknote which differs only in the technology by which the note is implemented? Why would someone accept a digital title to nothing over a digital title to property when we know, praxeologically, that no one would ever accept a paper title to nothing over a paper title to property?
put it this way, do you acknowledge that its possible for a person to prefer a hard copy of a newspaper over a potentially bad check?
Just to clarify, am I correct in saying you're talking about bitcoin on the free market, and not the first part of my last post? Well it isn't even necessarily the case that something like bitcoin would remain unbacked if a free market in money was to come about.
Smiling Dave:Must have missed it. Will you kindly provide the links to your two efforts?
The relevant is the last one: http://mises.org/community/forums/p/27611/493844.aspx#493844
Smiling Dave:I sure did, in my article [with apologies to Malachi] Bitcoin Takes a Beating
That's not a formulation, that's a story. It's a long shot from a proper argument.
Smiling Dave: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/
You're essentially talking to yourself, you avoid confronting the arguments your opponents have made. I thought it's just me, but it looks like you're avoiding others too. I told you to pick an Austrian economists to decide which definition of the regression theorem is correct, but you didn't. Already in the past I provided references to Austrians saying that an initial "intrinsic value" is not necessary (e.g. Bagus, Selgin, Kinsella), but you just dismissed them as irrelevant.
Smiling Dave:Due to the length of the article and the lateness of the hour, it will be in two parts. Here is a link to the first part. http://smilingdavesblog.wordpress.com/2012/10/07/bitcoin-and-the-numbers-game/
Let me quote from it:
Smiling Dave:... does that make playing cards a medium of exchange? The answer is, yes it does, for those transactions in which it was used. But it is certainly not a medium of exchange for in those transactions in which it was not used.
You're back to your old tricks where you attempt to obfuscate the difference between money and a medium of exchange.
Smiiling Dave:The answer, of course, is that it depends on how many people find the thing useful.
And here you conflate the (broader) transaction costs with a subset of transaction costs (the size of the network, AKA "double coincidence of wants").
But these are just auxiliary issues. The more fundamental one is that you lack a solid framework. I challenge you to formulate the regression theorem in up to five simple implications, like I did here: http://mises.org/community/forums/p/27611/493844.aspx.
Smiling Dave:People are selling yen and buying bitcoin, then buying dollars with the bitcoins? Why would they do that?
I can comprehend your conflusion as you appear to conflate the (broader) transaction costs with the size of the network. Even if more people want either dollar or yen than Bitcoin, using Bitcoin for a forex transaction between US and Japan decreases transaction cost (presumably, I did not calcuate it, but in other cases I did). Usually, the transaction costs are determined by liquidity, which in turn is usualy determined by the size of the network, but this is not the only factor influencing transaction costs. See Menger in Principles of Economics:
Carl Menger:But it is not easy to find an actual case in which an exchange operation can be performed without any economic sacrifices at all, even if they are confined only to the loss of time. Freight costs, loading charges, tolls, excise taxes, premiums for marine and other insurance, costs of correspondence, commissions and other sales costs, brokerage charges, weighages, packaging costs, storage charges, the entire cost of the commercial banking system, even the expenses of traders and all their employees, etc., are nothing but the various economic sacrifices which are required for the conduct of exchange operations and which absorb a portion of the economic gains resulting from the exploitation of existing exchange opportunities.
You admit yourself that after a certain threshold is crossed, a medium of exchange does not need "intrinsic" value anymore to sustain itself. If intrerpreted as a network effect, this threshold is called critical mass. If you consider the size of network (= double coincidence of wants) as the only factor influencing the demand, then it follows that the critical mass can only be reached once the corresponding medium of exchange is the dominant one (i.e. money). But if other factors are considered, then the critical mass can hypothetically be lower.
Bitcoin shows that there are cases when it is much lower than previously anticipated. This is due to the unprecedented technological innovation it provides, a dramatic reduction of transaction costs compared to anything else available. Various other factors, e.g. regulation and the existence of multiple currencies (as opposed to one worldwide) make the difference transaction costs higher.
In absence of these features (significant decrease of transaciton costs, higher resistance to interference from the state and banks), Bitcoin could not have arisen. On the other hand, as long as this difference persist, so will Bitcoin. For the foreseeable future, the typical user of Bitcoin does not have anything to switch to, as that would increase their transaction costs.
And Carl Menger recognises too that transction costs can be reduced:
Carl Menger:Economic development tends to reduce these economic sacrifices, with the result that even between the most distant lands more and more economic exchanges become possible which previously could not have taken place.
Clayton:In the present order or do you mean even sans government interference in money? The reason I ask is that the Bitcoin fanatics keep asserting that Bitcoin would be viable and would naturally arise in an unhampered market in money production.
In the absence of governments, Bitcoin would have it more difficult to establish itself, as the absence of governments would lead to a small number of currencies (maybe even one), and regulation would make bank transfers cheaper. In principle, Bitcoin would still have a comparative advantage, but it's possible that it wouldn't have been significant to overcome the network effect of the existing system.
Clayton:So why can't we state the same thing for a digital banknote which differs only in the technology by which the note is implemented?
We can, but the transaction costs of such a system would be higher than a pure abstract monetary base, because the maintenance costs of the underlying property. Money substitutes would also lead to credit expansion, and I'm not even talking about the effect of regulation on the transaction costs.
Clayton:Why would someone accept a digital title to nothing over a digital title to property when we know, praxeologically, that no one would ever accept a paper title to nothing over a paper title to property?
It's like asking what the purpose of email is and suggest that we use fax instead.
Overall, the maintenance and transaction cost of a modern monetary system is negligible compared to the physical (goods) part of the transaction, and with the centralization of money into banks their offering of interest on deposits and loans would cover this cost.
I suppose it would be as easy for banks to lend bitcoins as any other kind of money, but since they can't engage in fractional reserve banking they would be hard pressed to prefer this to other kinds of money, which would give a substantial advantage to traditional digital and pseudo-physical currencies.
Because it decreases their transaction costs. It's like asking what the purpose of email is and suggest that we use fax instead.
Because it decreases their transaction costs.
I'll disagree with this, because I don't think it answers Clayton's objection. A more accurate analogy to his objection would be asking what the purpose of a piece of property is, and then suggesting that someone trade their deed for an actual real physical property with a deed of a fantasy-property that doesn't exist. (Or might exist on a distant planet that's unreachable within a human life-time.)
It seems more likely that someone would prefer the deed to a property that exists and is 'achievable' in the forseeable future rather than an 'unreal' deed, even though the maintenance on the fantasy property would be far lower.
excel:Overall, the maintenance and transaction cost of a modern monetary system is negligible compared to the physical (goods) part of the transaction, and with the centralization of money into banks their offering of interest on deposits and loans would cover this cost.
It is smaller, but it is still present. In a system with a fiat base and money substitutes, the commercial banks need to keep reserves with the central bank, and reserves of cash, and they need to authenticate the users to make sure the deposit is there, and redeem the claims (this is in addition to authenticating clearing transactions). With commodity money, the commodity must be stored, redeemed and claims authenticated. If the base is purely abstract, these costs are absent.
I also suspect that regulation plays a significant role in the transaction costs.
excel:I'll disagree with this, because I don't think it answers Clayton's objection. A more accurate analogy to his objection would be asking what the purpose of a piece of property is, and then suggesting that someone trade their deed for an actual real physical property with a deed of a fantasy-property that doesn't exist. (Or might exist on a distant planet that's unreachable within a human life-time.)
This would be the case if there was an underlying property in the first place, and then a claim on it. But Bitcoin is not a claim in the first place. It's a pure network good, like other communication standards, including languages or the internet. Network effect creates value without property, by decreasing transaction costs of communication. This is not only true for money, but for all communication. If you
excel:It seems more likely that someone would prefer the deed to a property that exists and is 'achievable' in the forseeable future rather than an 'unreal' deed, even though the maintenance on the fantasy property would be far lower.
It highly depends on the purpose for which you intend to use it. If you do it for the purposes of consuming it directly, then holding a claim on something real is preferable, because it is expected that eventually someone will redeem the claim. If you want to "use" it within the context of communication, then it's completely irrelevant that it's purely abstract.
The example I like to use are IP addresses. They are not a claim to anything, they are purely abstract, the legal system does not recognise property rights in them. They are only usable within the context of communication, you cannot consume them. Yet they have a price. You can rent them and you can buy them. Renting or buying gives you the ability to use them within the context of communication, and make them unavailable to others in this context (with minor corner cases which we ignore for the purpose of the argument), therefore within the context of communication, they are scarce.
Using an IP address creates new communication possibilities that would not be possible with something that has a physical standard (e.g. a snailmail). Would adding something physical under IP addresses them make them more desirable? No. It would make them more difficult to be used within the only context where they can be used.
It would be absurd to argue that because IP addresses are a pure network good with no use for anything else outside of the context of the network, they cannot have happened, and that due to that, the internet will collapse. They happened because they presented a technological innovation, and had a first mover advantage, so the network effect had time to grow. In the past, more people who wrote letters, for example, than users of the internet. But already at the low penetration numbers, using the internet gave a comparative advantage to writing a letter. The advantages were not obvious to many, and could not be used all the time or by everyone, but they existed. The critical mass of network effect is lower when there is a disparity in technological level.
Even 15 years ago there were people who viewed the internet a fad. There was also the dot com bubble. But there was no competitor strong enough to satisfy the consumers in the way the internet can. So the adoption rate grew.
Pete,
A reply to your recent posts:
1. Let's keep to the topic at hand, the one I repeat over and over to the bitcoin folks that they ignore:
Please show exactly what line of the proof of the theorem is invalid, and why.
2. You did write some straw man version of the regression Theorem. But that doesn't cut it. You see, the way it works between serious people is that you summarize the theorem and the proof to your opponent's satisfaction, and then refute it.
The version you wrote is full of red herrings. Both Clayton and I have responded that it is not our version of the theorem, meaning not Mises' version either.
3. I'm sorry you could not follow my argument in Bitcoin Takes a Beating, and all you managed to grasp of it is "a story". Others with different intellectual capacity have said they understood it, and written so in the comments.
4. I'm not sure why you insist I appeal to authority. In serious discussion, laying out my case is considered sufficient.
5. You ask me to copy your style and give a five line summary of my thoughts. Sadly, that is indeed the current state of arrested development of certain people, whose minds cannot absorb anything longer than a sound byte. But as Einstein wrote, you should explain things as simply as possible, but not simpler. Obviously, the regression Theorem is a subtle concept, with many people unable to get it after so many attempts at clarifying, and cannot be placed in a Procustrean bed.
6. Transaction costs, network effects, are all red herrings. You have enough there for a large Bar Mitzvah. Make your summary using only concepts Mises used. Follow Einstein's directive. As simple as possible. Mises managed quite well without all the bloat and jargon and red herrings you introduced, and without referring to other obscure works, just using simple common sense and ordinary English.
7. Pete, I am not really replying to you, since I suspect you have an agenda, but merely responding so that interested readers know that you are wrong.
You may consider yourself honored that you are the second member of my Book of Trolls, so expect no further response. Number one, btw, is Malachi.
Smiling Dave:Please show exactly what line of the proof of the theorem is invalid, and why.
Since you have yet to formulate the theorem, I cannot address this. I addressed some auxilliary issues, which you also ignored.
Smiling Dave:You did write some straw man version of the regression Theorem. But that doesn't cut it. You see, the way it works between serious people is that you summarize the theorem and the proof to your opponent's satisfaction, and then refute it.
You have yet to show where exactly my argument is wrong. I presented four implications. Are any of them incorrect? Did I miss something? You don't say.
Smiling Dave:I'm sorry you could not follow my argument in Bitcoin Takes a Beating, and all you managed to grasp of it is "a story". Others with different intellectual capacity have said they understood it, and written so in the comments.
I understand the story, but it's not an argument. It's not a formulation of the regression theorem, because it's not a formulation of anything. It's a story.
Smiling Dave:I'm not sure why you insist I appeal to authority. In serious discussion, laying out my case is considered sufficient.
In this very post, you essentially said "been there done that", without actually having been there and having done that.
Smiling Dave:You ask me to copy your style and give a five line summary of my thoughts. Sadly, that is indeed the current state of arrested development of certain people, whose minds cannot absorb anything longer than a sound byte. But as Einstein wrote, you should explain things as simply as possible, but not simpler. Obviously, the regression Theorem is a subtle concept, with many people unable to get it after so many attempts at clarifying, and cannot be placed in a Procustrean bed.
Thank you for rejecting praxeology and reclusing to mysticism. Another indication is that you don't really intend to contribute to a debate, as if the year and a half of evasions wasn't a hint enough.
Smiling Dave:Transaction costs, network effects, are all red herrings. You have enough there for a large Bar Mitzvah. Make your summary using only concepts Mises used. Follow Einstein's directive. As simple as possible. Mises managed quite well without all the bloat and jargon and red herrings you introduced, and without referring to other obscure works, just using simple common sense and ordinary English.
Mises did not use these terms because they did not exist at that time. The term "saleability" nowadays is called liquidity. "economic sacrifices" (Menger) are now called transaction costs. And so on. Now we have more general names for them. Furthermore, by rejecting my terms you don't actually refute my argument. You're just saying that you don't like it.
Smiling Dave:Pete, I am not really replying to you, since I suspect you have an agenda, but merely responding so that interested readers know that you are wrong.
Since from the point of view of argumentation you have been ignoring me all along, you're essentially confirming that this was not a tactical decision but a strategy.
Smiling Dave:You may consider yourself honored that you are the second member of my Book of Trolls, so expect no further response. Number one, btw, is Malachi.
Since you have yet to actually provide an argument, this means nothing to me.
Smiling Dave:Bitcoin had, has, and will have, zero intrinsic value. Thus it can never start off a career as money. Thus it can never be a money at all, because you have to start somewhere, and it cannot.
The Euro never had intrinsic value. Yet, for some 300 million people, it is money. Therefore, your argument is incorrect.
It is smaller, but it is still present. In a system with a fiat base and money substitutes, the commercial banks need to keep reserves with the central bank, and reserves of cash, and they need to authenticate the users to make sure the deposit is there, and redeem the claims (this is in addition to authenticating clearing transactions). With commodity money, the commodity must be stored, redeemed and claims authenticated. If the base is purely abstract, these costs are absent. I also suspect that regulation plays a significant role in the transaction costs.
Present, but again, negligible. That is, when you purchase a good, the transaction cost of your electronic payment is functionally irrelevant compared to the transaction cost of the good. (Especially when you use it to purchase goods over large distances.) When you purchase a hardcover book on amazon with bitcoins, do you consider the transaction cost required by you turning on your PC, typing in, and sending an electronic packet to amazon (totalling, let's say .002 cents of cost due to use of electricity) as a more important factor then the transaction cost of having the book delivered by snail-mail at a 3 dollar fee?
This would be the case if there was an underlying property in the first place, and then a claim on it. But Bitcoin is not a claim in the first place.
Exactly. So a bitcoin is a 'claim to nothing'. A claim to a non-existent phantom-property. A good whose value is arbitrarily determined by the collective fiat of the participants in bitcoin-exchange related markets and backed by your trust in their willingness to exchange goods for bitcoins at that value. Which was Clayton's objection.
It's a pure network good, like other communication standards, including languages or the internet. Network effect creates value without property, by decreasing transaction costs of communication. This is not only true for money, but for all communication. If you
Most online Bitcoin related literature display a shocking lack of agreement with you in this claim, at least in terms of the classical use of the term network good. In fact, I can find no use of the term network good at all (beyond a 2000 paper on microsoft pricing), especially in regards to bitcoin. They also show no agreement with you in terming bitcoin a communication standard.
Right, and since we're talking about a currency it follows that we want to hold and use it within the context of exchange and value-retinence, and not within the context of communication, so I will take that as a concession that people would therefore prefer to hold claims to something over claims to nothing, even in terms of currency.
This would further imply that the transaction-cost gain of bitcoin over traditional electronic currencies would have to be high enough to overcome that preference. This seems unlikely, considering transaction costs of goods are far higher than transaction costs of traditional electronic currencies.
The example I like to use are IP addresses. They are not a claim to anything, they are purely abstract, the legal system does not recognise property rights in them.
I'm not sure if that is accurate (is it possible to sue someone for using the IP address you've paid to exclusively hold?), but in any case this is not a good example since IP addresses are not supposed to be used for currency, nor for the exchange of goods.
They are only usable within the context of communication, you cannot consume them.
Yet they have a price. You can rent them and you can buy them. Renting or buying gives you the ability to use them within the context of communication,
and make them unavailable to others in this context (with minor corner cases which we ignore for the purpose of the argument), therefore within the context of communication, they are scarce.
I think there's a strong case to be made that they are scarce in and of themselves, in that they require exclusivity of use (ignoring NAT at the moment) in order to be useful for their purpose while at the same time consisting of a finite range of acceptable values.
(If 2 people could employ the same land in the same way at the same time, land would not be scarce.
If any number of people people could use the same hammer at to hammer 2 different nails at the same time, hammers would not be scarce, even if there existed only a single hammer in the world. (conceptually, at least))
In other words, things are only scarce in the context of which people use them, and IP addresses are no exception to this.)
Using an IP address creates new communication possibilities that would not be possible with something that has a physical standard (e.g. a snailmail).
Would adding something physical under IP addresses them make them more desirable? No. It would make them more difficult to be used within the only context where they can be used.
It would be absurd to argue that because IP addresses are a pure network good with no use for anything else outside of the context of the network, they cannot have happened, and that due to that, the internet will collapse.
excel:Present, but again, negligible. That is, when you purchase a good, the transaction cost of your electronic payment is functionally irrelevant compared to the transaction cost of the good. (Especially when you use it to purchase goods over large distances.) When you purchase a hardcover book on amazon with bitcoins, do you consider the transaction cost required by you turning on your PC, typing in, and sending an electronic packet to amazon (totalling, let's say .002 cents of cost due to use of electricity) as a more important factor then the transaction cost of having the book delivered by snail-mail at a 3 dollar fee?
It looks like you missed my point. You talk about transaction costs of goods that you are trying to purchase, not the transaction costs of the payment system, and not about the costs associated with storage of the specie. You turned my argument upside down.
Bitcoin is also form-invariant and can exist in practically any form. There is no need to turn on the PC to perform the payment. You can use it in a mobile phone (QR codes, NFC, ...) and there are developments for dedicated platforms such as the one at http://bitcoincard.org.
If money substitutes have lower transaction costs than specie, they will be preferred to specie (indeed, without the difference in transaction costs, money substitutes would not exist in the first place). But money substitute needs an issuer, and a clearing process based on this issuer. This creates enormous costs.
excel:Exactly. So a bitcoin is a 'claim to nothing'. A claim to a non-existent phantom-property. A good whose value is arbitrarily determined by the collective fiat of the participants in bitcoin-exchange related markets and backed by your trust in their willingness to exchange goods for bitcoins at that value. Which was Clayton's objection.
Which was Clayton's objection.
Bitcoin is not a claim to nothing because it's not a claim. Similarly as gold is not a claim to nothing because it's not a claim. The value of Bitcoin is determined purely by its liquidity (which is a subset of the the network effect). Similarly as with other network goods, it remains to have value until a better competitor outcompetes it.
We use network goods all the time. Language is another example. Language is purely abstract and only has value because we build goods and services based on it.
excel:Most online Bitcoin related literature display a shocking lack of agreement with you in this claim, at least in terms of the classical use of the term network good. In fact, I can find no use of the term network good at all (beyond a 2000 paper on microsoft pricing), especially in regards to bitcoin. They also show no agreement with you in terming bitcoin a communication standard.
Check out Mikael Stenkula's paper Carl Menger and the Network Theory of Money for example.
excel:Right, and since we're talking about a currency it follows that we want to hold and use it within the context of exchange and value-retinence,and not within the context of communication, so I will take that as a concession that people would therefore prefer to hold claims to something over claims to nothing, even in terms of currency.
As economy evolves, money becomes more and more a communication standard and less an object.
excel:This would further imply that the transaction-cost gain of bitcoin over traditional electronic currencies would have to be high enough to overcome that preference. This seems unlikely, considering transaction costs of goods are far higher than transaction costs of traditional electronic currencies.
This is not only not unlikely, it is already happening. You can do international transfers cheaper when you add Bitcoin to the mix, for example.
excel:I'm not sure if that is accurate (is it possible to sue someone for using the IP address you've paid to exclusively hold?), but in any case this is not a good example since IP addresses are not supposed to be used for currency, nor for the exchange of goods.
As both Bitcoin and IP addresses are only usable within the context of communication, the problems of exclusivity can be to a much larger extent resolved by technological means.
IP addresses are a network good. They are not very liquid, but that's not because they are abstract but because their features make them unsuitable for liquidity.
excel:You cannot consume a view, either. And yet, people are able to value a view. Does that mean that houses with a great view cannot collapse due to faulty construction work? How does mentioninga collapse in this context even make sense? (See your later comment)
My point was to demonstrate that the opponents of Bitcoin cannot explain why Bitcoin should suddenly lose value. They think that there is something irrational about the valuation. But as I've been trying to explain, Bitcoin already allows one to decrease transaction costs. It does not need to be money to do that. It would be irrational to switch from it. I'm not saying it's impossible, but the reasoning is poor.
It's like saying that the internet would suddenly collapse because IP addresses are abstract and therefore worth nothing.
excel:No it doesn't. If you purchase an IP address you can't use it for anything unless you have the necessary networking equipment.
Ah, here I see your confusion. Yes, of course you need something physical, like the networking equipment. But without an abstract protocol, the networking equipment is worthless. That's the whole point. Bitcoin allows the physical banks to be replaced by computers, similarly as the networking equipment all but replaced the post office. But without a common underlying protocol, this would be impossible.
excel:I think there's a strong case to be made that they are scarce in and of themselves, in that they require exclusivity of use (ignoring NAT at the moment) in order to be useful for their purpose while at the same time consisting of a finite range of acceptable values.
They are only exclusive within the context of communication. Plenty of computers have 127.0.0.1, and it's not exclusive, for example
excel:(If 2 people could employ the same land in the same way at the same time, land would not be scarce. If any number of people people could use the same hammer at to hammer 2 different nails at the same time, hammers would not be scarce, even if there existed only a single hammer in the world. (conceptually, at least)) In other words, things are only scarce in the context of which people use them, and IP addresses are no exception to this.)
The scarcity of physical world is irrespective of context, as a use of a physical object always makes some other uses impossible. And the scarcity of abstract things is always only contextual and manifests itself through the exclusivity of physical objects (e.g. media).
excel:IP address communication would be impossible without a physical standard for communication. (e.g. computers, switches,etc)
Correct, but a communication protocol is a prerequisite for the computers to communicate.
excel:Adding a physical network system under IP addresses would not only makes them more desirable, it gives them the only reason to BE desirable. Not adding a physical under the IP addresses would make them IMPOSSIBLE to use under the only context where they can be used.
Here we confuse "under" and "above". You build networking infrastructure on top of the IP protocol, not below it. Similarly, the nodes, goods and services are built on top of the Bitcoin protocol, rather than below it. Putting something below IP would make no economic sense, just like putting something below Bitcoin protocol would make no economic sense.
excel:What does this even mean? What are you even trying to say here?
That network goods can be purely abstract, and in some cases it makes no sense at all of for them not to be abstract.
If money substitutes have lower transaction costs than specie, they will be preferred to specie (indeed, without the difference in transaction costs, money substitutes would not exist in the first place).
Where the first 'rags' lower in transaction cost than gold coins? Depends on what you mean by transaction costs in this instance.
Transaction cost too high.
Concession accepted.
International transfers of what? Are you saying the cost of transporting a crate of bananas from new york to singapore magically becomes less expensive if you pay for it in bitcoin? By how much?
So why make a comparison with a good that is SUPPOSED to be liquid?
No it isn't.
The scarcity of physical world is irrespective of context
Here we confuse "under" and "above". You build networking infrastructure on top of the IP protocol, not below it. Similarly, the nodes, goods and services are built on top of the Bitcoin protocol, rather than below it. Putting something below IP would make no economic sense, just like putting -something below Bitcoin protocol would make no economic sense.
excel:No, I consider your point misguided, in that the transaction cost of the payment system is so miniscule compared to the other transaction costs normally associated with an exchange that they become near irrelevant in terms of economic calculation by individuals. At most, this would be a calculation question for suppliers of payment systems, and since there is no supplier of a bitcoin payment system there's no real comparison for potential suppliers to make.
Ah, I see your point now. You need to consider however that the transaction is not an isolated one, but occurs within the broader marketplace. It is preceded by the transaction costs of the capital goods you are using, and succeeded by the transaction costs of the produce. So it is not the revenue that is the relevant base for comparison, but profit. If you need to pay, say, 3% fee for accepting a debit card payment, and your markup when using cash is 6%, then by accepting a debit card you halve your profit. Is that minuscule?
I used to work in the online payment industry, so I know firsthand the costs associated with processing transactions. Admittedly, a lot of that is due to the lack of competition (as banking is regulated), but I already admitted that in a pure free market economy the difference between Bitcoin and another system would be lower.
excel:And yet, all these forms are also available to any other modern digital currencies, and all suffer from the same transaction costs.
Only as money substitutes, which I already explained suffer from both unavoidable costs due to issuance and regulatory costs due to the state. A prime example is GoldMoney, which due to regulation you can only use as a method of payment if you live in Jersey (and since Jersey now accepted FATCA, it might not be true for long either). So the transaction costs are prohibitive: GoldMoney does not want to risk legal actions against it, and without their cooperation you cannot use the deposits you have with them as a medium of exchange. You need to either sell them for fiat, or withdraw them in specie, which eliminates the purpose of a money substitute in the first place.
excel:Where the first 'rags' lower in transaction cost than gold coins? Depends on what you mean by transaction costs in this instance.
I do not understand this.
excel:So why the need for a bitcoin system, if all you need is the liquidity? You can far better liquidity from just writing '5 dollas' in an e-mail and sending it back and forth... (No need for all those clearing houses that tell you whether this is a 'real' bitcoin or not.)
You need a common standard if you want to use the network effect. That is why we have language, IP addresses and Bitcoin.
excel:International transfers of what? Are you saying the cost of transporting a crate of bananas from new york to singapore magically becomes less expensive if you pay for it in bitcoin? By how much?
No. If you, for example, change dollars to Bitcoins in the US, then transfer Bitcoins to China, and then sell the bitcoins locally for yuan, you end up with more yuan as if you used other methods of transfer, and it's also faster. See http://www.thebitcointrader.com/2011/10/send-money-to-china-with-bitcoin-and.html. The idea that by having more steps you can lower your transaction costs seems counterintuitive, but it's been researched already. Krugman for example wrote two papers where he argues that people are motivated to use dollar for international payments in preference to local fiat monies, as it is more liquid. With Bitcoin, the technological improvements have a similar effect on international trade as liquidity has on dollar.
excel:Oh, I thought bitcoins were supposed to be used for exchange. I guess real actual currencies don't have to worry about any competition from it at all, then.
You admitted just above that as economy progresses, money is becoming more about communication, and now you object to it.
excel:So why make a comparison with a good that is SUPPOSED to be liquid?
Because liquidity is a subset of the network effect.
excel:So you made a completely irrelevant point in regards to Clayton's objection.
It is not irrelevant, it explains exactly where his mistake is. He thinks that one particular factor ("backing") precedes others in deciding what to use as a medium of exchange. But which factor takes precedence depends on context. Normally, liquidity, not "backing", takes precedence. That does not mean that "backing" is never the determinant, but that it is neither in case of Bitcoin nor in case of fiat.
excel:Why doesn't bitcoin need to be money to decrease transaction costs?
Because it provides a technological advantage, and that allows it to have a comparative advantage in transaction costs even in some cases where normally liquidity is the determining factor. It merely needs to be a medium of exchange, which it already is.
excel:I thought the whole point was that bitcoin AS A CURRENCY decreases transaction costs by removing the need for clearing houses. Now you're saying that it doesn't have to be currency to more efficiently do the thing it was designed for which it isn't?
No. I'm saying that already at the current level, Bitcoin can be used to decrease transaction costs, even though it is not liquid enough to be called money. From the perspective of self-sustaining liquidity, the critical mass has already been reached, even though Austrians in the past seem to argue that this can only happen if the medium of exchange is already the most liquid one.
excel:concl : therefore, bitcoin doesn't need to be currency to lower transaction costs.
I did not say Bitcoin doesn't need to be currency. I said Bitcoin doesn't need to be money, i.e. the most liquid medium of exchange. It just needs to be a medium of exchange at a level where it can provide a comparative advantage in transaction costs compared to money. And that level already has been reached, as there is empirical evidence of transactions where it does decrease transaction costs. The only way to revert this is to provide to the market actors an alternative that has a more desired combination of liquidity and technological transction cost reduction. But this seems highly unlikely in the foreseeable future. Fiat and gold are burdened by regulation, so are unlikely to reduce their transaction costs, and other cryptocurrencies do not have sufficient liquidity.
excel:No. Without the equipment, the IP address and protocol is worthless. Without the IP address and protocol, the equipment can still be used.
Similarly as the computers and goods and services that build the Bitcoin ecosystem can be used for something else without Bitcoin.
excel:No it isn't. A world that doesn't know about gasoline does not have a scarcity of gasoline. A world where people don't harvest crude oil doesn't have a scarcity of crude oil.
excel:the OSI model is pretty specific about where the physical layer is compared to the network layer.
AJ: However, the "no starting value" argument died for me the day I realized that sending money home from Japan would be way cheaper and faster if I used Bitcoin.
However, the "no starting value" argument died for me the day I realized that sending money home from Japan would be way cheaper and faster if I used Bitcoin.
In the days before Bitcoin system I could send money faster an cheaper almost anywhere in the world by using my credit card or checking account as compared to going there by foot and giving recipient money myself. Still credit cards and checking accounts did not become money. Why? I think because these are services not commodities. Bitcoins themselves are useless as commodity. What is valuable to some extent, to me and judging from this quote to you, is Bitcoin system (as defined by OP in Step1) which, to me, can be considered as a service.
boniek:In the days before Bitcoin system I could send money faster an cheaper almost anywhere in the world by using my credit card or checking account as compared to going there by foot and giving recipient money myself. Still credit cards and checking accounts did not become money.
Actually, a checking account is a money substitute (credit cards are not according to the Austrian definition of the money supply).
boniek:Why? I think because these are services not commodities. Bitcoins themselves are useless as commodity. What is valuable to some extent, to me and judging from this quote to you, is Bitcoin system (as defined by OP in Step1) which, to me, can be considered as a service.
It is indeed helpful to view Bitcoin as a service, but that alone still leaves the questions of price and liquidity open. Checking account and credit card use units that are external to them, Bitcoin does not. It also does not automatically negate the viewpoint that Bitcoin are a commodity. Services can become commoditised.
Peter Šurda: Smiling Dave:Bitcoin had, has, and will have, zero intrinsic value. Thus it can never start off a career as money. Thus it can never be a money at all, because you have to start somewhere, and it cannot. The Euro never had intrinsic value. Yet, for some 300 million people, it is money. Therefore, your argument is incorrect.
Hah, check and mate :)
Just and a thought here. You may remember that my humble blog recently listed a whole slew of attempts at creating "money", such as the Ithaca Hour, all of whom flopped on their faces in a few years.
Let's pretend we are in the year 2009, right before the Ithaca Hour flopped. There must have been a Smiling Dave out there, a lone voice of sanity, saying the Hour is doomed, and there must have been plenty of Petes and his ilk, crowing about how the Hour proves Mises wrong, or satisfies the theorem in some spiritual way, and all the other gems of flawed reasoning we have seen here. What could that 2008 version of Smiling Dave had said? For one, what I have been saying, that we are talking about a small population, not big enough to count, that give the thing time and will flop, that no flaw exists in Mises logic. And sure enough, in 2010, Happy New Year. The Ithaca Hour is dead. Short live the latest scam, bitcoin.
So guys, count not your chickens before they hatch. Come back in a few years and we'll pick up the discussion again.
BTW, the last few posts here have sunk to new lows, thinking they have discovered America with fiat currency, or redefining "money" the way they want it, when that nonsense has already been rejected long ago. Mises took care of fiat money [read what he wrote, guys, before thinking you know anything about it. I mean, would you offer your critique on Godel's Theorem when all your knowledge on any subject comes from I Love Lucy?], and Wikipedia on Money took care of the money definition [already mentioned in this forum].
Smiling Dave,
Ithaca Hours are not money in the narrower sense, i.e. they are not what economists call outside money, specie or money proper. They are a wannabe money substitute. They are not subject to independent valuation (they are pegged to the dollar).
There is, however, a more successful attempt: WIR. WIR is pegged to the Swiss Franc and has existed for about 78 years. In 2005 the amount of existing WIR was about 3 billion, and it had 62.000 users.
Bitcoin is not a money substitute as its value is not pegged to anything, rather is purely the result of interplay of supply and demand for Bitcoin. The number of users of Bitcoin is nowadays estimated at between 500.000 to 1.000.000 and the value of existing Bitcoins is about 120 million USD.
The two problems Mises' Regression theorem addresses are the emergence of price and the emergence of liquidity. With Ithaca Hours and WIR the price emerges through a peg, similarly as with other money substitutes, or with fiat money. That leaves the question of liquidity open, it may or may not be at a level where the network effect is self-sustaining (i.e. critical mass). I did not actually measure liquidity of either, but based on the anecdotal data I would say for Ithaca Hour it hasn't been crossed, and for WIR it has.
Some random news: Although the price of a bitcoin is only about 1/3 what it was in last year's blow-off top, total bitcoin market capitalization is approaching par with the $150 million it reached at that same peak.
AJ,
for quite some time I've been critical of using market capitalisation or the exchange rate as a meaningful variable for measuring the success of Bitcoin. I prefer liquidity.
On a somewhat lighter note, my attempts to debate with Smiling Dave remind me of this scene (between 7:23 - 8:18): http://www.dailymotion.com/video/xsmjsn_dvd-clannad-07_shortfilms
@Ithaca Hour: The key to remember is that Ithaca Hours, USD and Bitcoin all have something in common - they are unbacked currency. The difference between Ithaca Hours and USD is that the former is not backed by an aggressive, warmongering gang with taxing authority, whereas the latter is.
The Regression Theorem does not say that it's impossible for backed money to be exchanged for unbacked money, it merely states that what really gave an unbacked money its value when it first came into use was not the government's declaration that "this shall now be money" but, rather, the liquid exchangeability of the unbacked money for backed money. What motivated people to make the exchange is a separate matter.
So, the Regression Theorem is only applicable to Bitcoin in terms of restricting how it may become valued - it will not become valued through any government dictate or by any gimmick or tech-sexiness. It will become valued solely through its liquid exchangeability for present money (US dollars, other monies).
Going back to the issue of what motivates people to exchange better money for worse money, I think that we can fairly state that this is solely the consequence of some kind of government interference in the market. Hence, the debate over Bitcoin is really a speculative debate over whether it is, in fact, better or worse than existing monies (i.e. can Bitcoin compete in the government-fiat market in money production) and/or any possible money (i.e. can Bitcoin compete in an unhampered market in money production).
a) Can Bitcoin compete in the government-fiat market in money production? Contrary to the more pessimistic folks, I believe that Bitcoin - or any unbacked digital token service - is actually well-situated to compete with government-fiat money. The problem that Bitcoin creates for central-banker-money is similar to the problem created by BitTorrent for Establishment media copyright-holders: To shut down the "pirate" network, you either have to resort to unrestrained brutality in enforcement or you have to shut down all communication networks (on a separate topic, now you know where the "Internet Kill Switch" crap is coming from).
This makes Bitcoin virtually ineradicable and may make the adoption of a Bitcoin-like technology - in order to stop the Bitcoin threat - by official governments inevitable as the "future of fiat money."
b) Can Bitcoin compete in an unhampered market in money production? My bet is "no". There is no a priori theoretical reason that can be derived to determine that Bitcoin could not possibly succeed unless you posit that Bitcoins are inherently valueless (which, I think, is not far from the truth).
In an unhampered market in money production, the bar of competition would be much higher. In the present environment Bitcoin merely has to attract people away from nearly worthless bits of constantly-devaluing slips of paper. Bitcoin, or any unbacked digital token, does not have to be that great of a money, it merely has to be better than the alternative (horrible, central-bank paper money).
There are a few major problems with Bitcoin that I think eliminates it from the race in an unhampered market in money production:
1) Collapse risk. This was demonstrated last year with the massive run-up and crash in Bitcoin in a matter of a couple days. Even were the market-cap of Bitcoin so large that no one individual or group could launch any meaningful attack on it, it would still be vulnerable at all times to a collapse in confidence/demand in a way greater than any competing money substitute that is actually backed by something (contractually redeemable/securitized). Bitcoins are said to be "backed by what they can be traded for" but this is sophistry - a Bitcoin is not a secured claim to anything, unlike a banknote or similar legal agreement.
2) Inflation. Yes, inflation. The Bitcoin enthusiasts go on and on about the 21 million limit. But that limit can be changed at any time by the Bitcoin community. This is not likely to happen with circumstances in their present state because of the distributed nature of the Bitcoin client. Nevertheless, the point bears repeating as I believe that central banks may move to supplant Bitcoin by rolling out their own Bitcoin-like protocols (Canada has already announced its plans to do something like this). One argument they are doubtless going to put forward is "Bitcoin is inflation-proof!" It needs to be noted that there is nothing actually stopping Bitcoins from being expanded by an arbitrary degree and that the incentives to do so only increase as the Bitcoin user-base increases. There is always more than one way to skin the cat.
Do pay attention to the man behind the curtain.
Clayton,
it looks like you're seeing things increasingly my way. I think you're more forthcoming now to Bitcoin than before.
Ithaca Hours are not money in the narrower sense, as they have a fixed exchange rate, similarly as other community currencies. They are a wannabe money substitute. While there is little research about this, I think that if they ever become unpegged they collapse. They don't have sufficient comparative advantage over fiat. Bitcoin or USD are valued however on their own.
The influence of government intervention on the use of fiat currencies is, in my opinion, exaggerated. That's not to say it isn't present, but after a while, if liquidity is sufficiently high, the influence becomes unnecessary. As evidenced by international trade and countries where legal tender laws are weak, or even countries which have a comparably faster depreciating currency, people normally choose based on liquidity, not by "backing" (i.e. they switch to dollar rather than gold). The governments tend to impose harsher restrictions (e.g. capital controls) as the currency collapses (e.g. recently Venezuela or Iran), because as long as it "kind of" works, the restrictions are unnecessary. If all legal tender laws were abolished (and Bitcoin didn't exist), I would expect everyone to move to the dollar, unless the FED screws up horribly.
I fully agree that Bitcoin would have it much more difficult on a free market. The existence of fiat money, banking regulation and multiple currencies benefits Bitcoin enormously, and it looks like they were a significant motivator in its inception and adoption. But if Bitcoin reaches sufficient liquidity before a free market is established, then this liquidity would make it harder for newcomers to compete. It's a dynamic process. Similarly as in the previous paragraph with the dollar, what happens if there ever is a free market depends on the level of liquidity cryptocurrencies have at that time. If it is sufficiently high, then "backed" money cannot outcompete it anymore.
I am very critical of using the exchange rate of Bitcoin as a measurement of its success. Liquidity is more important. So I am not worried about the bubble that occurred last year, or big players causing price fluctuations. A complete collapse is highly unlikely as long as there is no reasonable alternative. The fall of Bitcoinica worries me much more, because while it was operating it had a positive influence on liquidity.
The change in the money supply worries me even less. Even if you manage to persuade a large chunk of users to accept the change, the result would be a fork in the blockchain: two mutually incompatible versions with the same starting point, with everyone being free to choose which one to follow. You wouldn't be able to scam someone to accept payments from the inflated fork if they prefer the non-inflated one. Most likely the new version would collapse right away. You can't do this stealthily like the bank holidays favoured for redenominations for fiat money.
A government-sponsored alternative is unlikely to compete because the unwillingness to relinquish control increases transaction costs. MintChip, for example, while it can hypothetically decrease transction costs, requires a blackbox chip, so it's not form-invariant, and it's not a money in the narrower sense either, it's a money substitute. It's a centralised solution.
MintChip ... [is] a centralised solution.
Exactly. What did I say earlier in the thread - when Gramma Marge puts her husband's life insurance award payment into Bitcoins (or MintChip), then I will call it money. But Gramma Marge hasn't the slightest inclination to differentiate between the security of a distributed, cryptographic protocol - something she will never comprehend and even most average folks of the street will not comprehend - and the security of a government mint. The fact that a distributed protocol that is under no one's specific control is actually more secure than a government mint (look at all those huge steel vaults, it must be secure!) is lost on the man-off-the-street. Furthermore, as a general principle, "the unwashed masses" are distinctly distrusted by those very same masses, particularly when it comes to matters of finance and security.
Hence, if the governments of the world decide to go the MintCoin direction, you can kiss Bitcoin goodbye. It might stick around as an ineradicable fringe money but it could never compete shoulder-to-shoulder with central-bank-issued digital fiat money.
Part of what informs my pessimism on this point is the failure of popular cryptography. During the heady days of the mid-to-late 1990's, everyone was predicting that military-grade crypto would become a widespread, de facto phenomenon on the Internet. It is my belief that the NSA and other leading intelligence services around the world were ordered to treat this as a dire threat to national security and develop a strategy to stop it. Their answer? Google, Gmail, YouTube, Facebook, Twitter, iPhone, iPad, Android, etc. etc. How do these sites prevent the use of cryptography? By providing free-but-unencrypted services. Combined with shiny, fun User Interfaces, the man-on-the-street happily chooses to fork over his name, number, address, SSN, credit-card info, bank account numbers, financial documents, legal documents, compromising photographs and every imaginable sort of data which any sane person should want to keep under physical lock and key at best, or at least encrypted with state-of-the-art crypto if it must be stored on a medium that is not in one's physical possession. What we have looming now is "The Cloud" which, in Google's model, is a completely unecrypted, "trust our servers not to be hacked or compromised by our employees or turned over to the FBI or IRS (or NSA) on request"-model. Cf Google Drive. Dropbox is the same story. Encrypting your data is still at least a two-step, wholly-manual process.
If you think that the Fed is any less aggressive in its intent to maintain an iron grip on the production of money than the NSA is in scheming to take over virtually the entire consumer market for Internet services to keep them crypto-free, you're mistaken. No expense will be spared. After all, they own a fully-legal money-printing press with unlimited printing speed.