The theory of money in the tradition of Carl Menger. Part II
“In this part I will critique Rothbard’s theory of money (Rothbard is a follower of Ludwig von Mises on money, as far as I know), then I will apply Menger’s theory to fiat money, and lastly I will comment on the Bitcoin phenomenon based on what I have written up to that point.”
Fascinating article. A comment or two:
By that reasoning, all speculative demand should be ignored in all economic discussion, since the speculator only wants it to sell it to some Carol down the road. Which means if many new speculators enter a market for gold, say, their activities cannot raise the price of gold, since they do not increase demand. I think it’s a big mistake to claim such a thing, contradicted by everyday happenings. How do you account for Tulipmania, for example? Or the recent housing bubble? Or any bubble?
What makes you say that? I would argue that it’s based on current existing demand. Would you accept a payment in money that will only become legal tender five years from now? Or do you want to be able to spend it right now?
Not at all. Is that what you think when you get paid? “This is great, next year these Euros will be worth even more.” All people want is to the same return. They buy with the purpose of selling, but not in order to get a higher return, but because doing it this way, as opposed to barter, is more convenient. That is the benefit.
Since the “if” part is wrong [see above], the “then” part falls away.
I am very surprised to read this. A copper mine churns out new copper as time goes on. The value of the mine depends on how much new copper will be produced. Copper coins, on the other hand, do not reproduce. That’s all there is, those coins. They do not creat future coins like the mine brings forth new copper.
The pricing of coins is based on good old supply and demand. How many people want those coins right now, and what are they willing to give up to get them. And the reason they want those coins is to spend them some day, yes, but they do not think that tomorrow the coins will have greater purchasing power than today. Why should they think such a thing?
I find it hard to believe that a simpleminded person thinks about money in terms of speculation. He thinks about what he can get for it right now, and thinks that in the future he can get more or less the same thing. When people use money, it is not as part of some gamble about it becoming more valuable later.
By that reasoning, all speculative demand should be ignored in all economic discussion, since the speculator only wants it to sell it to some Carol down the road. Which means if many new speculators enter a market for gold, say, their activities cannot raise the price of gold, since they do not increase demand. I think it’s a big mistake to claim such a thing, contradicted by everyday happenings. How do you account for Tulipmania, for example? Or the recent housing bubble? Or any bubble?
A speculator is thinking about the future. If speculation happens that drives up the price, it means they believe the price will be higher than what they’re buying it for.
Robert Murphy explains how this works:
http://www.youtube.com/watch?v=VKk3vCbnigc&list=PL41749EBC473528F8
What makes you say that? I would argue that it’s based on current existing demand. Would you accept a payment in money that will only become legal tender five years from now? Or do you want to be able to spend it right now?
I’m making an a priori statement. When you accept something in payment that you don’t intend to use, by logical neccessity you are betting on being able to sell it after you have bought it. 5 seconds later or 5 years later are both in the future.
Not at all. Is that what you think when you get paid? “This is great, next year these Euros will be worth even more.” All people want is to the same return. They buy with the purpose of selling, but not in order to get a higher return, but because doing it this way, as opposed to barter, is more convenient. That is the benefit.
What is put in now: goods or services sold
Higher return in the future: what one aims for
If I’m a baker then I am buying with bread. That is what you’re putting in.
I am very surprised to read this. A copper mine churns out new copper as time goes on. The value of the mine depends on how much new copper will be produced. Copper coins, on the other hand, do not reproduce. That’s all there is, those coins. They do not creat future coins like the mine brings forth new copper.
A copper mine produces a limited amount of copper. A copper coin produces a limited amount of value for producers.
I find it hard to believe that a simpleminded person thinks about money in terms of speculation. He thinks about what he can get for it right now, and thinks that in the future he can get more or less the same thing. When people use money, it is not as part of some gamble about it becoming more valuable later.
picture of German hyperinflation
The topic of inflation is a standard part of wage negotiations.
Neisio,
I understand how they drive up the price, but I don’t understand how they drive up the price if we grant your assumption that a speculator does not change demand, since after all, he is going to sell it to some Carol.
Here’s my thinking.
A speculator does not increase the supply.
Neilsio assumes he does not increase the demand.
Prices are determined by supply and demand.
Therefore, if the supply is the same and the demand is the same, the price will not change.
Therefore, the entrance of a speculator does not change the price.
But we see he does.
Therefore 2 is wrong.
Maybe there is a translation problem here. The word speculation as commonly used in the US, means [to quote Wikipedia]:
Speculation is the practice of engaging in risky financial transactions in an attempt to profit from short or medium term fluctuations in the market value of a tradable good such as a financial instrument, rather than attempting to profit from the underlying financial attributes embodied in the instrument such as capital gains, interest, or dividends.
But people who use money are not doing that at all. Most people don’t see it as risky, and they are not attempting to profit, certainly not from short or medium term fluctuations.
Investopedia.com on Speculators:
A person who trades derivatives, commodities, bonds, equities or currencies with a higher-than-average risk in return for a higher-than-average profit potential. Speculators take large risks, especially with respect to anticipating future price movements, in the hope of making quick, large gains.
People who use money instead of bartering do not fit that description.
I understand how they drive up the price, but I don’t understand how they drive up the price if we grant your assumption that a speculator does not change demand, since after all, he is going to sell it to some Carol.
I’m not saying speculation cannot increase price. I could offer a million dollars for 5 tomatoes, expecting them to be worth 1.1 million tomorrow. But I’d be wrong and lose money.
Maybe there is a translation problem here.
In part 1 I elaborated on what Austrians consider speculation. I quoted Jeffrey Herbener who was discussing Rothbard.
Dave, do you deny that people use money as a store of value?
http://www.fool.com/investing/general/2013/04/05/why-bitcoin-is-doomed-to-fail.aspx
It’s written by someone who is clearly not Austrian. But the facts he mentions have relevance to an Austrian analysis.
Here are facts from the article, and their Austrian relevance in brackets and = sign.
Nobody is actually buying anything with bitcoins. We are talking about hoarders almost exclusively [99%]. [= Not widely used for exchange, thus failing in first criteria for being a medium of exchange].
Bitcoin all in all is a tiny tiny market. [= Not widely used, thus failing in first criteria for being a medium of exchange].
The price of a Bitcoin is directly related to the publicity given to Bitcoin. [= AKA a fad, not a medium of exchange].
The moment someone actually tries to release a significant amount bitcoins on the market [for example, actually use them as money], bitcoin prices will drop like a stone. [=not a medium of exchange, which requires that it’s purchasing power does not melt away if you actually try to spend it].
http://ibankcoin.com/rcblog/2013/03/30/peter-schiff-on-bitcoins/
TL;DR: A hot potato that last guy holding the bag will be stuck with. No use at all, unlike fiat currencies that have to be used to pay taxes.
Has to be reedemable for something tangible [=the regression theorem]. Nobody legally obligating himself to give you anything for a bitcoin.
Note how the caller just goes on zombie like chanting his mantras, not getting it at all.
not true, read your mises. I will leave it to you as a homework assignment to discover for yourself where and how mises addresses the topic of intangible goods. truly, I have already informed you, alas you must lift your own veil of ignorance.
must be why you refrain from following your own rule of restating your counterpart’s argument in terms he would find acceptable. because youre a transparent troll.
Malachi, forgive me, but I stopped reading what you write long ago, when I realized you have no clue. So could you do me a favor and link to where you already informed me?
Of course I restate my counterpart’s arguments. Do you even read my blog?
Apparently you are as poorly informed on the nature of a “homework assignment” as you are on the nature of exchange media and digital cryptocurrency. alas, I am unable to explain it to you, as per your own admission that you find my writings too threatening to your fragile mental state. hence more homework for you. hopefully one day you will come to understand what that means.
of course you have failed to restate your counterpart’s argument to his or her satisfaction on many occasions, this thread being but one example. anyone with a solid grounding in logical thought could see that doing something once or twice is not the same as doing something whenever it is appropriate. understandably, this distinction escaped you, as a result of your lack in the aforementioned qualification. I wish you well in your studies, you evidently have much work to do. good day.
SDave, let’s say the dollar fails one day and people begin using bitcoin primarily. Will you refuse at that point to use bitcoin, for the rest of your life?
Nielsio,
the main issue I see with your argument is the same as with Smiling Dave: you assume that indirect exchange has one step. But this is not supported by the writings of Austrians or by empirical data. Our current economy uses multi-stage indirect exchanges in the vast majority of transactions.
Once we realise the possibility of multi-stage indirect exchange, we realise that Bitcoin already is a medium of exchange, and is used in indrect exchange in practically all its transactions. And since it decreases transaction costs, people will continue using it. Indeed, you quote Menger on explaining the transaction costs yourself.
Nobody is actually reading your blog. The five people are irrelevant (I arbitrarily decided a threshold). According to your own logic, you are a fraud and must collapse.
I am not assuming indirect exchange has one step. For example, I quote Menger’s chapter ‘The facility with which commodities circulate’, I point out speculation (which can be a multi-trade process), and in my chart in part II you can see how the indirect exchange stage can be a longer period (and thus between multiple people).
Furthermore, I also point out how any item can be used in indirect exchange.
“This is not to say indirect exchanges are not possible with Bitcoin, as indirect exchanges are possible with anything, provided you can sell it later on. With a market money or a government money, you are basing your acceptance and price speculation on usage. With Bitcoin, you are basing your acceptance and price speculation on future buyers who believe in Bitcoin as a money, and who further expect to find yet another person. This pricing by economic ideology and popularity is extremely volatile, which makes it a bad money.”
this is a very misleading series of statements.
bitcoin is market money, so the first statement should (and does) apply.
acceptance of government currency is based on several things including precedent, convenience, and ultimately the power of the state to compel obedience. “usage” would seem to imply that fiats have industrial value (since you saw fit to lump them in with market money) whereas they in fact do not carry industrial value over and above the material they are manufactured from.
in the second statement, one could easily replace “bitcoin” with any fiat currency and any commodity money that carries significant exchange value in excess of its industrial value. such as gold.
contra the second statement one could easily assert that acceptance of bitcoin is based primarily upon usage. this is because bitcoin has industrial value.
Ok Nielsio,
then I must have misunderstood your argument, and don’t actually understand it. If you admit multi-step indirect exchange, then your argument about prices is rendered irrelevant. If you use Bitcoin as a transaction mechanism on top of fiat money, then the fluctuations of exchange rates are irrelevant, because you just use the spot price and can hedge against the fluctuation for the duration of the settlement.
So what is your actual point? That Bitcoin is not suitable for economic calculation? That is only relevant if it’s used as a dominant final means of payment. Which Bitcoin may or may not evolve into (at very high levels of liquidity, which also imply a lower price volatility, negating the objection anyway), but it’s not a factor for evaluating its suitability as a medium of exchange. It’s an entirely separate question. It looks like you’re mixing two things together.
Or that you can’t make reasonable assumptions about demand for Bitcoin? You can, becuase they decrease transaction costs and that creates demand. Cash registers also decrease transaction costs of using fiat, but they are not money themselves. Are you going to argue that people won’t use cash registers because their price can fluctuate?
I have defined market money as money with its value grounded in future direct use. I have defined government money as money with its value grounded in future direct use in taxation (and other governmental requirements). When I say market money I am not talking about whether or not it is a product of the market. I recommend you read my article so you understand the context.
If you read the context, you would know what I mean by ‘usage’ of government money. This is the context:
"Instead of taxing from the market the money that the market itself has selected, a government can require in payment specially designated items that the government itself is the producer of. Economizing on future industry can get completely displaced by a system of tax credits, as far as money activity goes. Government workers earn directly in these tax credits, which non-government workers have to trade real wealth and services for in order to get them.
In all the following situations is possession then required, for turning them over to the government: income tax, capital gains tax, corporate tax, property tax, inheritance tax, expatriation tax, transfer tax, wealth tax, value added tax, sales tax, excise tax, tariffs, license fees, and any services that government provides.
Governments will make the private production of the previous market money illegal, leaving as only alternative using the government tax credits (fiat money). In the real world this process from market money to government money happens gradually. First a 90% government gold coin is set as legal tender, then an 80%, et cetera, until it finally switches over to a pure tax credit system with no direct use in the market."