Bitcoins *prove* Mengerian account of money creation?

Economics Economics Questions
81

The regression theorem explains that media of exchange must have a price (which Mises calls “objective exchange-value”), and in order for this price to emerge, it needs to be backtracked to barter. It is an odd way of phrasing the phenomenon of the network effect. Mises explains this in ToMC when he says that people want money not only because they use it directly, but because they other people demand it. He explains this results in a change of ordinal ranking caused by the preferences of other people. This explanation is identical to that of externality: utlity a person derives from a good is influenced by the utility others derive from it.

Some people interpret this as that the “backtracking” requires a legal or a coercive (which explains fiat money) foundation. Mises however elsewhere argues that, for example, money substitutes do not require a legal link for redemption, a customary redemption is sufficient. Then there is no reason why this restriction should apply to the link in the evolution of money in the narrower sense either. In other words, if a medium of exchange trades against other media of exchange, it does not matter why as long as it works.

Since Bitcoin has a price, and has a historical link to preexisting money (see http://www.bitcoincharts.com, for example), either it fulfills the regression theorem, or the regression theorem is wrong. Take your pick. How exactly the price emerged might be of interest to economic historians, for the purpose of the regresison theorem, however, is irrelevant.

The reason why some people claim that Mises’ Regression Theorem disproves Bitcoin (rather than the other way around) is that they are making implicit assumptions which I already explained, for example:

  • there are only production goods, consumption goods and media of exchange
  • the number of users takes absolute precedence in the outcome of the network effect
  • a medium of exchange requires some arbitrary starting price, which is above that of Bitcoin

These are just what I said, implicit assumptions. Mises only made the first one, he didn’t make the others. Those were made up by his faux-followers.

Even before Bitcoin, economists have already predicted the emergence of completely virtual currencies on a free market. Selected references:

  • Tatsuo Tanaka (1996): Possible Economic Consequences of Digital Cash
  • Michael Woodford (2000): Monetary Policy in a World Without Money
  • Malte Krüger und Hugo Godschalk (1998): Herausforderung des bestehenden Geldsystems im Zuge seiner Digitalisierung - Chancen für Innovation?

The last one is, in my opinion, the most accurate prediction, because it foresees the issues with integration with existing monies, and also that the advantages of this new money can, under certain circumstances, overcome the network effect of fiat money. Here’s a quote:

or in English:

There is no way of telling what the future of Bitcoin will look like. However, it it fails, it won’t be due to the regression theorem, rather because it stops having the advantages it has, or at least they won’t be sufficient to compete either with other currencies or other payment systems.

82

Brilliant link, Jon. This quote says it all:

83

Jon,

I read the paper you linked to, but fail to see how his speculations disprove the regression theorem.

Please enlighten me. Keep in mind the example of the triangle drawn in red, meaning show me exactly which line of the proof of the regression theorem is “challenged” by bitcoin or by idle speculations concerning nonexistent moneys. Don’t forget to first summarize the theorem and its proof.

84
  1. If Jesus raised Lazerus from the dead how many witnesses does it take for it to become a verifiable fact?

Let’s not mix religion into this discussion.

  1. How many fools does it take to believe bitcoins are money before it becomes true after a fashion?

A very good question. I will answer with a paraphrase of an old song by Arlo Guthrie. When you can get anything you want with bitcoin. Economists use the ambiguous phrases “genarally accepted” and “widely used”. I like to use the example of cigarettes in a prison, where you can get anything you want with cigarettes.

So far, nobody on the face of the Earth buys more than one thousandth of his weekly purchases with bitcoin. No store or company will deal mostly in bitcoins. Sure, you can buy some odds and ends, the internet equivalent of stuff offered one time only at a garage sale, but nobody has a bitcoin business, where he makes thousands and thousands of, say, sandwhiches or even software, rubbing his hands and saying “Oh boy, I’m gonna have me some bitcoin from all this. That’s why I opened my business, to pile up mountains and mountains of bitcoins, Mwahaha.”

And once again, Mises Theorem explains why bitcoins, with all the wonderful advantages it has, hasn’t hit it off [and predicts it never will, based on logic]. Bitcoin has a FATAL FLAW. Nothing can cover up for this fatal flaw.

85

Since in the Misesian/Rothbardian system, there are no immaterial goods (more precisely, they are neither production goods nor consumption goods), if you insist that a new money must have a legal link to a previous money, on a free market, this would mean that once people develop a sufficiently advanced nanotechnology or nuclear synthesis, there cannot be money anymore. Since the old money would become worthless, a legal link to it would be equally useless. And since the physical distinction among physical goods would be rendered irrelevant, there could be no new money arising from a commodity. So if your assumptions are correct, such a world would be stuck forever in a state of barter.

86

Mises’ Regression Theorem does not explain any such thing. Its purpose is to explain how prices of media of exchange form. Since Bitcoin already has a price, either it conforms to MRT, or MRT is wrong. Whichever you pick depends on how you interpret the individual components of the theorem, as explained above.

None of the interpretations leads to the conclusion you are presenting. You never coherently explained this alleged “logic” underlying your position.

87
  1. The regression theorem explains that media of exchange must have a price (which Mises calls “objective exchange-value”)…

First mistake. You don’t understand what objective exchange value is, and/or what a price is.

  1. *…and in order for this price to emerge, it needs to be backtracked to barter…*Second mistake. The regression theorem doesn’t backtrack anything to barter.

  2. It is an odd way of phrasing the phenomenon of the network effect.

Third mistake. Network effect has nothing to do with the regression theorem.

  1. Mises explains this in ToMC when he says that people want money not only because they use it directly, but because they other people demand it. etc etc.

A true statement, but unrelated to the regression theorem, so fourth mistake.

5*. Some people interpret this as that the “backtracking” requires a legal or a coercive (which explains fiat money) foundation. Mises however elsewhere argues that, for example, money substitutes do not require a legal link for redemption, a customary redemption is sufficient.*

True.

Then there is no reason why this restriction should apply to the link in the evolution of money in the narrower sense either. In other words, if a medium of exchange trades against other media of exchange, it does not matter why as long as it works.

True.

However, all this has nothing to do with the regression theorem. So fifth mistake.

  1. Since Bitcoin has a price..

True

and has a historical link to preexisting money (see http://www.bitcoincharts.com, for example),

True, in the sense that some fools were buying and selling it to each other, and there is a record of their foolishness. But that has nothing to do with the regression theorem. Because the regression theorem discusses media of exchange, which bitcoin never was, is not now, and Mises predicts never will be.

either it fulfills the regression theorem, or the regression theorem is wrong.

Nope and nope. It is not a medium of exchange.

  1. The reason why some people claim that Mises’ Regression Theorem disproves Bitcoin (rather than the other way around) is that they are making implicit assumptions which I already explained, for example:
  • there are only production goods, consumption goods and media of exchange
  • the number of users takes absolute precedence in the outcome of the network effect
  • a medium of exchange requires some arbitrary starting price, which is above that of Bitcoin

And only black triangles comply with Pythagoras’ Theorem.

8 .Reference all the people you want, but first explain why Pythagoras’ Theorem only applies to black triangles.

Bottom line: The summary both of the regresion theorem and its proof is all wrong. So of course the rest of the post is irrelevant.

88

Since in the Misesian/Rothbardian system etc etc

I dunno Pete, I guess you are just too smart for me, because to my limited mind all you wrote is just meaningless rambling.

But that’s OK. Maybe someone else gets it.

89

Mises’ Regression Theorem does not explain any such thing…

Finally, we are getting somewhere. It sure does say such a thing.

My good ole blog laid it all out [look for Bitcoin Takes a Beating]

90

Here you make two implicit assumption:

  • (again) that there are only consumption goods, production goods and media of exchange
  • that relative liquidity of goods is only affected by the relative number of people trading it

The first one I already addressed, so let’s take a look at the second one. It has no solid foundation in economic theory, it looks more like something someone who dipped a bit into economics might come up with. Liquidity and the number traders are heterogenous variables and while there often an interrelationship between them, it’s not absolute. Also, it neglects transaction costs (again).

Bitcoin is highly liquid. If you look at the bid queue on Mt. Gox, it shows a sum of 25 million, which is more than the number of Bitcoins that will ever exist, and over 3 times the number of Bitcoins currently in existence. Selling Bitcoins is trivial, and I can do it faster than going to a shop accross the street and “sell” my euros. This liquidity is upheld by professional speculators, who know how to earn from price fluctuations. Also, if the price drops, this causes a new influx of speculators (or at least money from the old ones), because the number of Bitcoins is limited and they can get a greater chunk of the pie that way. This will bid the price up again.

While the speculation goes on, the development of user friendly payment systems (for example Bit-Pay.com) and other services is performed by others. There are certain parallells to what happened with Linux, or the internet, except that the hype came relatively early for Bitcoin. But since Bitcoin is decentralised, there was no way of preventing the bubble, or for that matter, formation of markets in the first place. In fact, some people, including the lead developer Gavin Andresen, predicted the bubbles. But as I said, there’s nothing he could have done to prevent it. The evolution of the price of Bitcoin, and the services built upon it, need to be considered separately.

91

If you do not believe me, go and ask any Austrian economist. You on the other hand, have provided no alternative, just that you disagree.

I provided about 5 quotes which explain this. Some claim that rather than backtracking to barter, it just needs to backtrack to a commodity (regardless of whether in barter or in a monetary system)

Since I provided an explanation and you didn’t, I have it difficult taking this seriously.

Why exactly is it unrelated?

Again, just an assertion. Your response lacks the essence of a response: an actual argument.

Robert Murphy disagrees and claims that Bitcoin is a medium of exchange: http://www.youtube.com/watch?feature=player_detailpage&v=wyUNdzLwte4#t=1563s Robert Murphy, the guy who wrote the study guide to Theory of Money and Credit.

In other words, you made something up and then present it as a “theory”. Bitcoin is a medium of exchange and only dogmaticsts like you refuse to accept that.

Lack of argument again.

Bottom line: you present zero arguments or counterarguments, the only thing you say is that you disagree with me. That’s not even childish, that’s just intellectual fraud.

92

I actually prefer the 1996 Tanaka article because he anticipates the bearer qualities and characteristics of digital bearer instruments which is the ‘true’ definition of digital cash. See my page http://digitalcash.org/ The other reason that I prefer Tanaka is that that he cites my work in note 22. How’s that for my own academic regression theorem?

While I understand where you are going with qualitative vs. quantitative features, I maintain that a modification to Mises’ Regression Theorem is justified because the ‘binary features of value’ possible with negotiable digital bearer instruments have transcended the Theorem. This is not to say that Mises was wrong, it is just that he did possess all of the unknowable knowledge at the time. The bitcoin feature difference is qualitative and one way that this is demonstrated is through BrainWallet.

BrainWallet allows one to memorize the bitcoin private keys in your brain with no other physical representation. People can literally send money to your brain and you alone possess the method to re-assign that portion of the block chain. Their existence and, moreover, their specific attachment to you cannot be proven anymore than your possession of an air guitar can be proven. If you say that air guitars are an absolute qualitative difference from real guitars than you have to say that bitcoin characteristics of survivability and non-confiscation are an absolute qualitative difference too. It is not a difference that’s on a relative quantitative scale.

93

I just want to understand the meaning of “get anything you want.” How do you measure that exactly?

Ancient Chinese used cowry shells as currency which had no intrinsic use I am aware of. Since you would argue a whole geographical region the size of China used currency that was not money because it doesn’t conform to the theorem I want to understand the measurement. Does “anything you want” mean if I have cowry shells but I want something in Egypt, I am not aware exists, and they don’t accept cowry shells, mean it can’t get me anything I want? What if cowry shells get me anything I want in China, does that count?

Furthermore, there are places that do not accept cash. Cash may not get “anything you want.” In light of this how is cash still considered money?

Please elaborate how to measure “get anything you want” because there is an inconsistency here. Apparently there is a minimum threshold to “get anything you want” but even if it is not accepted everywhere you can still “get anything you want.”

And what about private credit? What was the intrinsic value of Diners Club private credit before Mastercard and Visa came along? Can you “get anything you want” with private credit that has no intrinisic value from Visa or Mastercard despite they are not accepted everywhere but may be commonly used?

94

Each of these articles is slightly different. Tanaka for example only mentions that digital cash can have its own unit of account very briefly and uses this to sound alarm claiming this might affect monetary policy. The other two articles on the other hand say that we should not worry about governments’ being able to conduct monetary policy when competing with virtual cash.

Nice, didn’t spot the citation.

I am afraid I don’t understand your point. If you have a bearer instrument, it still needs to have a price to be usable. Sure, digital goods have sometimes advantages over analog ones (e.g. ebooks vs books). But that alone does not create value. There needs to be something more. I suggest low transaction costs as a decisive factor for media of exchange, because this allows liquidity.

This is just a method of using Bitcoin. A cool one, admitted, but that alone does not create value. The point is that Bitcoin is easy to transfer. If it wasn’t, no matter how cool it was, it wouldn’t work as a medium of exchange. The extreme counterexample I was able to come up with are black holes. They are difficult to steal, not prone to a decrease of mass, and it’s easy to send new matter into them. But they are not easily transferrable (you can’t move them very well or withdraw matter from it), so they are not useful as a medium of exchange.

Maybe I’m just more Austrian than you :-).

Would you be willing to chat on skype or something? I think we can exchange a lot of interesting thoughts.

95

What particularly you have a problem understanding?

96

Also one more thing re Smiling Dave. Even if we disregard the question of Bitcion being a medium of exchange (which you due to ideological reasons deny), me pointing out that immaterial goods exist and have value, despite not fitting into any of the three categories (consumer goods, producer goods, media of exchange) invalidates the argument against Bitcoin. It becomes a false dilemma fallacy, as the threefold classification is non-exhaustive.

Yet again, I provided point by point refutations of your claims, and you, yet again, not only failed to mount a successful defense, you’re not even willing to describe your own position. Why anyone pays attention to you is a mystery to me. But since I’m not a psychologist, I’m content with not knowing the reason for that.

97

Livefree,

Wikipedia on cowry shells:

Shells of certain species have historically been used as currency in several parts of the world, as well as being used, in the past and present, very extensively in jewellery, and for other decorative and ceremonial purposes.

Credit cards are not money. They are convenient ways of using dollars as money. Try to pay someone by handing him your credit card and see what happens. Bitcoins, however are not used to pay someone with dollars. They themselves are the money, supposedly.

As for getting anything you want, the line is not clearly drawn, wrote Mises. You’ll see phrases like “generally accepted” and “widely used”. In short, look in your fridge, your pantry. Look around the place you are at right now. Check your mail for bills. How many of the things you see can you buy with bitcoins? Close to none, right?

As for places not accepting cash, they do want to be paid in dollars, right?

Pete:

All you write is probably way over my head, because it just makes no sense to me. Guess I’ll have to settle for my own poor understanding.

98

Smiling Dave,

what in particular don’t you understand?

99

Smiling Dave,

I can accept the point about cowry shells used in jewelry however it still doesn’t address vague terms and that shells were not accepted everywhere but commonly accepted in some parts of the world.

Credit Cards on the other hand I am willing to further debate. In addition to debating this point I can cite a court motion someone I personally know submitted to a court in a credit card controversy that resulted in a major credit card company defaulting.

So let me address how court works. Credit card companies send you a letter claiming you owe a debt. When you do not respond the credit card company goes to court and says hey court, we sent this person a notice of a debt and they did not respond. The court takes a position honorable people respond and tells the credit card company the court will send notice on behalf of the company. If you do not respond to the courts notice you are found to be in default at a hearing.

So here is what someone I personally know did. They did not respond to the court notice but showed up on the day contained in the notice for the hearing. Obviously a default judgement is the only likely outcome of this hearing without any pevious response. It was basically said:

Your honor of course I will pay any debt owed however I demand proof for any debt claimed. I demand more than some notice I owe a debt because anyone can send anyone a notice they owe a debt. I demand evidence for a source of funds I received and an official agent of the company who can testify to such a source of funds along with book keeping records to evidence the source of funds. The court recognized the legitimacy of the demands and provided the credit card company thirty days to respond. The credit card company never responded which resulted in a dismissed case as a result of their default. At the time I suggested to the person I know they ought to motion for a dismissal with prejudice and then sue for fraud but tthey never did. :slight_smile: On a side note… all of the attorneys present in that court room asked for a copy of the motion and weeks later I noticed several interesting debt relief ads from law firms on TV. Miracle theory? Who knows but an interesting coincedence nonetheless.

Private credit != dollars.

If they do not accept cash and only accept private credit how can you think they want to be paid in dollars? Maybe they do want to be paid in dollars but are too FOOLISH to realize private credit is not dollars. How many FOOLISH people does it take before something becomes as you say… a fact? If Visa or Mastercard went bankrupt tommorrow because FOOLISH people lost confidence in private credit would vendors that accepted private credit today receive any dollars?

You admit “generally accepted” or “widely used” have no measure which means you are asserting a theory you can’t empirically prove yet demand proof of others to empirically disprove something you can’t prove.

Now I don’t have the answer but I will suggest something. People talk about bell curves, early adopters, and things like that when a product hits the market. I would speculate ideas are similar which would provide some kind of probabilty trending to concepts such as “widely used.” I am also going to go out on a limb regarding the regression theorem and this whole belief in commodities. When people see something being used it becomes possible for valuation to occur. If people are not aware something exists there is no valuation. This is a big reason why when we talk about what is likely to become money we say it has to be a commodity first. However I do believe anything is possible if people choose to believe in it. Private credit illustrates this point because private credit is not a commodity it is a promise to pay and people choose to believe in this promise accepting it. It is not a new phenomenon with regards to money because we can trace believing in promises back to gold wharehouse receipts. I do think it is possible for an environment to become so, for lack of a better word, bad, that people could consider using something like bitcoins. i do think it is possible if a bad environment continued to worsen where people began to lose hope it becomes easier for people to believe in the “impossible.” Does the regression theorem account for such a possibility? I don’t know. I’ll get back to you if it happens. You would argue it is impossible because people would resort to trading with what they know and can value (ie. a commodity) which is easily explained by the regression theorem… well… despite that the regression theorem talks about what people are likely to believe there are a lot of fools who accept private credit.

I dunno, seems like I could get quite a few things with bitcoins. There is even a precious metal section in the wiki.

100

Live Free,

  1. In those parts of the world where cowry shells were commonly accepted, it was money. In places it wasn’t accepted, it wasn’t money. Niot sure what the problem is here.

  2. I don’t see the relevance of credit cards. Nobody thinks credit cards are a new money. You don’t have the dollar, the euro, the swiss franc, and the credit card. The underlying money that credit cards move from one person to another is dollars [in the US]. Bitcoins, on the other hand, are themselves the money.

  3. I did not ask for empirical proof of anything, rather for logical proof, or more precisely, a logical chain of reasoning to show exactly where the regression theorem’s chain of reasoning falls apart in the various circs people here have claimed. In other words why doesn’t pythagoras theorem apply to green triangles?

  4. As for the argument that anything is possible if people believe, or if they lose hope, what can I say? I am not used to such ways of reasoning. None of my Math professors told me that 2+2=5 if enough people believe, or lose hope.

Maybe you mean that if enough people believe something is money it will become money. Fine. But the regression theorem discusses what makes people believe something is money, and it claims that bitcoin has a FATAL FLAW which will stop people from ever believing it is money.

True, if the whole world simultaneously dropped acid in strong enough quantity, then the regression theorem might not apply for as long as their trip lasted. But we aren’t talking about that, are we?

  1. The only way I see a point in continuing the discussion, lively and interesting though it is, is if you would first summarize both the statement and the proof of the regression theorem. Because your whole argument about people accepting private credit tells me we have different understandings of what the regression theorem says.