Hello everyone! I am new to Austrian economics and am trying to understand the Misean regression theorem and how it applies to fiat money and debit cards. If a nation were to start a new fiat currency with no intrinsic value and did not charge taxes, am I understanding correctly that the Misean regression theorem states this would never actually achieve the status of money? And if it did charge taxes, this would instill an intrinsic value, and so it could achieve the status of money? What if the money were tied to another money, as the Omani rial is to the dollar - does this instill an intrinsic value in the medium?
How does the Misean regression theorem apply to digital representations of money exchanged via debit cards? Why do these seem to have achieved status as money (or am I just wrong about that)? Does it have something to do with the fixed exchange rate between dollars and digital dollars (not sure about terminology here)?
Thanks so much for any help you can provide!
If a nation were to start a new fiat currency with no intrinsic value and did not charge taxes, am I understanding correctly that the Misean regression theorem states this would never actually achieve the status of money?
Check.
And if it did charge taxes, this would instill an intrinsic value, and so it could achieve the status of money?
Not intrinsic value, because that would mean it had usefulness besides shopping with it, such as being able to eat it or wear it etc. But it would have some value, albeit not intrinsic. See http://mises.org/daily/4262
What if the money were tied to another money, as the Omani rial is to the dollar - does this instill an intrinsic value in the medium?
Not intrinsic value, because that would mean it had usefulness besides shopping with it, such as being able to eat it or wear it etc. But if the new fiat currency was redeemable in some other currency whose value was already set, then it would have the value [or close to it] of the other currency.
How does the Misean regression theorem apply to digital representations of money exchanged via debit cards?
Those have the value of being redeemable in cash at par [or at least everyone thinks they are, which is good enough]. It's a similar situation to the one described in the previous answer.
Why do these seem to have achieved status as money (or am I just wrong about that)?
Because everyone is certain they are redeemable at par for cash.
Does it have something to do with the fixed exchange rate between dollars and digital dollars (not sure about terminology here)?
It does indeed. See above.
General intro:
The key idea of the regression theorem is that for something to be accepted as payment the the rock bottom minimum requirement is that the potential recipient [say the butcher who is selling his meat] has to know exactly what he is getting and what he can use it for. If he's getting something with intrinsic value [he can use without having to shop with it, like gold which can be used and is coveted as jewelry] that's certainly good. If he is getting something he thinks he can easily turn into cash, why that's fine, too.
But if all he can do is shop with it, and it is not clear just how much he can buy with it, then why should he take a gamble and accept it?
When a new fiat money is introduced in some country, say Freedonia, and it's not good for anything but shopping, and it's not clear how much he can buy with it, he won't accept it. Even if the Freedonian govt announces its worth as one US dollar, that means nothing, because that does mean sellers will actually accept that value when they sell their wares. Only if the govt is willing to exchange it for one US dollar will it have that worth.
You can find an explanation of Mises' Regression Theorem in simple language right here.
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You seem to have a decent grasp on the regression theorem. I consider the RT to be one of the most impressive works of Austrian value theory in actual application to date. I'm sure that there are other similar applications out there that haven't been thought of yet.
Anyway, one of the insightful things that RT really emphasizes is that there is no intrinsic value to money. A dollar is only worth a dollar because by and large and in general individuals perceive it to be so, and because of this there are factors that correct any misestimates of the value of money. At any rate, because a dollar could theoretically be worth a thousand ears of grain, or none at all, there needs to be some value that we can anchor the dollar to because money as a medium of exchange has no value per se. Everything else gains value out of direct or indirect utility satisfaction, therefore the only way that money can derive value is off of this. Therefore at some point or other money has to have this property of utility satisfaction in some way other than through exchange for other goods, namely some good that it "equates to". Something that better exemplifies this is the fact that money doesn't even have to be what we traditionally think of as "money". Money, a vague term in a lot of ways, is nothing other than a generally accepted medium of exchange, something that people generally will exchange things for. It could be butter, bottle caps, or hair follicles depending upon situation and preferences. Unless a certain good has the properties of being generally desired then there's no reason why it would emerge as money.
Think of it as starting potential. to become a money something must have extrinsic value (by which I don't mean that the value isn't subjective, merely that the money represents something which directly grants utility, rather than something which is exchanged against an array of goods in return for money), however because exchange is so valuable, the non-exchange values of money, the indirect values of money soon take a back seat. Theoretically the moment nearly all prices emerge in terms of gold the government could then declare an entirely fiat standard and everything would be relatively fine because, so long as confidence in the stability of the currency is assured, the primary source of value for the currency is its use in exchange, not its physical use.
As for your question about the ability of governments to assign value to currency through taxes, while this is next to impossible to do in our real world since the world economy is interconnected and you couldn't start an advanced economy in the absence of currency, it nonetheless poses an interesting possibility. If we take a society that is currently engaging in barter with no clearly dominant money, then why couldn't a government merely attach its currency to a good and demand that? If the government declared a dollar worth 10 cabbages, then it would need to issue just enough money relative to cabbages or else the price of cabbages would plummet, people would alter their exchange rates just to avoid accepting the money. Nor can the government assign taxes to income since there is no monetary income to be taxed. I can't charge you for 10 percent of your income since it's not obvious what that is. Therefore I really think that it's impossible for the government to do since people would just alter their behavior to avoid paying the taxes.
A universal flat tax might work, but I think you'll have similar alterations in behavior. For instance if the government says everyone owes it 100 dollars a year then you have two problems: the first is that the government would arbitrarily have to decide what to confiscate what it would take if this didn't happen, in which case it would have the same problem above as the values of those goods would drop. Secondly people would just hold money as a means of paying taxes unless the first condition altered their behavior.
The problem is that everything is subjective.
Anyway, back to your actual question. Debit cards are just a means of changing physical money into digital money that is more portable. The money already exists and is just changed into a different form, it's no different than a checking account. Meanwhile credit cards perform services similar to a bank loan. The credit card company (I believe) has the money and so it pays it directly. It assumes that the debtor will someday have the money, and therefore the assumption of future money is what is being exchanged. Physical good for current money for future money.
Does this answer your question? If you have any other questions about AE feel free to ask me. I'll answer your questions, although I can't promise that I'll do so in a straightforward or simple way... I will try though!
Regression theorem is just an explanation for the value attached to what we usually call liquidity.
In an "equilibrium" world, people would not want to hold liquidity, they would want all their assets allocated where they generate most income.
Having money under the mattress would be stupid, since this money could be converted into useful things.
But the real world is uncertain and not in equilibrium, so liquidity has value. You don't know what you're going to need in the future, so holding some cash gives you the chance to make the decisions as you go.
Liquidity is based on expectations. An asset is liquid insofar as people think it's easy to trade it for other things.
Mises explained how certain commodities can "naturally" acquire liquidity value due to their physical properties being fit for trading. Items like gold begin to be traded due to their non-trading uses, but as they are very fit for trading (it's easy to measure, durable, scarce etc), they rapidly acquire liquidity uses."Naturally" here means that nobody needs to convene or invent money at any given point, it just emerges through increased use in transactions, like natural languages and their grammar and vocabular conventions.
That's not the only possible source of liquidity value.
Credibility or reputation transfers can also work as a basis for the expectations that enable liquidity. Ultimately, all fiat currencies and all debt titles are traded based on some form of reputation, either by governments, institutions or private debt issuers.
How these governments and insitutions acquire and sustain their reputations might not please libertarian sensitivities, but that does not seem to block many of them from using dollars and pounds.
Electronic or paper documents are not a very important distinction here, except perhaps that modern technology reduces significantly the cost of electronic transactions.
But even before electronic technology, almost all cash in deposit accounts existed only in the "books", with no physical paper counter part stocked in some vault.
The regression theorem is not about liquidity. See link in previous post to find out what it is about.
Thanks Smiling Dave! I've read a lot of the bitcoin pieces on your blog, which is what prompted these questions - just wanted to make sure I was understanding before going any further. I was thrown off a little by the comment, "But on the other hand, if I keep some [fiat money] around, enough to pay my taxes, it will keep me out of Federal Prison. So it does have some use to me." I suppose this was just establishing that fiat money can have value (albeit not intrinsic) while bitcoins happen to have negligible value.
That's right fustruly.
Thanks for reading my humble blog.
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Smiling Dave: The regression theorem is not about liquidity. See link in previous post to find out what it is about. Sorry, I haven't had the time to read your blog. If I recall the language Mises use is more like "exchange value" and "intrinsic value". There a many possible definitions of liquidity of an asset, like small bid-ask spread, small market impact, large daily volume of trades. They all mean that the market expects that there are many traders both on buy and sell side of this asset. Assets that are liquid acquire what Mises called "exchange value". Generally, the most liquid of all assets are the spot currencies. "Blood alone moves the wheels of history" - Dwight Schrute | Post Points: 20
There a many possible definitions of liquidity...They all mean ...
Smiling Dave: There a many possible definitions of liquidity...They all mean ... The regression theorem is not about liquidity by any definition. To the blog, Batman. Look for "Bitcoin Takes a Beating".
Yes it is. If not explain what liquidity is if not the component of "pure exchange value" or "purchasing power" of an asset.
All these mean that there are little transaction costs by using this asset to intermediate transactions, that is, it's value is reasonably stable (on the short term), it's traded in large volumes with little market impact, and it's easy to find counterparts willing to make transactions using it, both on the buy and the sell side.
Toxic,
The topic is not what liquidity is [which you defined wrongly in your last post, btw].
All you wrote is irrelevant.
Have you even read the regression theorem?
I don't know how to get through to you, so I hereby give up trying. Horse has been led to water, nothing more to do.
Neodoxy, your explanation about assigning value through taxation makes sense if we're talking about backed currency. (And has helped me clarify my understanding significantly, thank you!) But if we're talking about unbacked currency, as here: http://mises.org/daily/4262 , isn't the situation a little different? Suppose taxes are collected annually. Then in the first year after the money is distributed, everyone hoards whatever they have and then pay at the end of the year. All good. But then the government uses this money to pay for things - but you're saying that nobody would accept this money? But then people would receive some punishment and do better next time, though, right?
Feel free to forward me to any resources that could clarify anything that seems fundamentally wrong with my thinking here. I have only recently introduced myself to Austrian economics, so I still have a lot of reading to do. And I will be sure to keep asking questions! Thanks for your assistance!
Smiling Dave: Toxic, The topic is not what liquidity is [which you defined wrongly in your last post, btw]. All you wrote is irrelevant. Have you even read the regression theorem? I don't know how to get through to you, so I hereby give up trying. Horse has been led to water, nothing more to do.
Perhaps you're right. My job requires me only to navigate and explore liquidity in the market by suggesting strategies and designing the algorithms that traders deploy. It does not require me to come up with conceptually satisfying definitions for what liquidity is. Hence my "wrong definition".
But I'm sure you're qualified to produce one, since you have a blog on austrian economics, and I don't.
And since I've read Mises' Human Action and Theorie des Geldes during college (2007-2009), I guess I must need to refresh or perhaps correct my understanding of his argument by reading the authoritative texts you've since posted.
Unfortunately, I still have not had the time to read it. But I will.
Good luck in your pursuit of these fascinating topics.