Bitcoins *prove* Mengerian account of money creation?

Economics Economics Questions
101

Smiling Dave,

as Robert Murphy says in the referenced video, which is oddly similar to what I said in the past too, the question whether Bitcoin invalidates regression theorem or not depends on how you inteprets its components. The claim that you present here, that the regression theorem somehow disproves Bitcoin, on the other hand, can’t be logically derived from Mises’ writings.

How about instead of rambling, you start presenting actual arguments, starting with formulating definitions, assumptions and the logical operations that fit together?

Oh wait, that would mean that you would need to grow up. I see how that might not be appealing to you.

102

He doesn’t care. He lives in his own imaginary world which is immune to logic.

103

OK, the Bob Murphy video.

He says that Mises was only talking about gold, but not that every possible money under the sun, in all of past present and future history, must start off the way gold did.

Which goes to show you he didn’t read my blog, where I quote Mises in Money and Credit saying explicitly that indeed he is talking about every money under the sun. that was and that will be. I also quote Rothbard and others who said the same thing.

Murphy makes the following argument in his video.

  1. If Mises meant it for all moneys, ever, then it has to apply to all media of exchange as well.

  2. In particular, it has to apply to bitcoin.

  3. But bitcoin is a media of exchange which does not fulfill the criteria of this understanding of the regression theorem.

  4. Therefore Mises’ theorem was talking about gold, historically, but not about every money imaginable.

His mistake, of course, is step 3. If you watch the video, you’ll see that he didn’t read my blog, where I explain why he is mistaken.

104

Robert Murphy didn’t make the “1 2 3 4” argument you’re presenting. First of all, he admitted two possibilities: Mises was wrong, or Bitcoin is a (weird) commodity. So a linear representation of his position is wrong.

Furthermore he didn’t say that Mises didn’t say that “all money must originate as a commodity”. He said that he doesn’t think Mises explicitly said that in ToMC, but once David Gordon quoted to him from HA where he says something like this stronger. Coincidentally, I also emailed with David Gordon about this in the past, and he also quoted HA, presumably the same one he did to Murphy.

But again, even if Mises was correct in that a medium of exchange must have value when it becomes a medium of exchange, it still does not mean that Mises refutes Bitcoin. This is an elementary logical error. The only possible conclusions are that either Mises was wrong, or that indeed Bitcoin had a value when it became a medium of exchange. Denying that Bitcoin is a medium of exchange is an ideological argument. Whether something is or is not a medium of exchange is an empirical question, not an economic one. Mises defines a medium of exchange as thus:

and

As long as someone accepts something with the intention of using it in another exchange, rather than consume it or use it in a production process, it is a medium of exchange.

Furthermore, it is very rare that a good has a zero price. Even paper money has some non-monetary uses, for example there was a recent news story about Hungarian bank notes being used for heating. Any non-zero price is usable as a starting price. And inded this is what happened with Bitcoin, as the speculation presented by Murphy also demonstrates. People started trading Bitcoins very cheap, at an practically insignificant, but non-zero, price. Why it had this price is, from economic point of view, irrelevant. Over time, markets evolved which allowed these trades to occur easily and quickly. This allowed the ad-hoc trades to equilibrate to a relatively uniform price. Because this happened, this only supports the suitability of Bitcoin as a medium of exchange: it’s easy to transfer, and sufficient liquidity formed. As long as there’s liquidity, this suitability will persist.

But even if Bitcoin wasn’t a medium of exchange, as I said already several times, the argument that this somehow refutes Bitcoin, because it is a false dilemma fallacy (since there are valuables than producer goods, consumer goods and media of exchange).

Even David Gordon who supports your presentation of Mises’ opinion, didn’t say that this disproves Bitcoin. In an email to me, he said:

So, a summary of some of the errors you are making:

  • you arbitrarily declare that Bitcoin is not a medium of exchange (for reasons you don’t explain, presumably ideological)
  • you incorrectly revert an implication (Mises’ Regression Theorem) into a logically invalid construct
  • it is rare that goods have zero price, and any non-zero starting price satisfies the regression theorem
  • you present a false dichotomy in relying on value only being possible for producer goods, consumer goods and media of exchange
  • you confuse liquidity with universality
105

Smiling Dave,

You keep saying that Mises presented some sort of formal logical proof for why Bitcoin can’t possibly work, but I don’t see that anywhere in his writings, even where you purport to show it in your blog post (Bitcoin takes a Beating) with the passages you cite where Mises is explaining the theorem. What I see is Mises presenting a satisfactory explanation of the purchasing power of money (and the one that merely presented itself as the most obvious explanation, once the previously missing time element had been introduced). Nowhere is there a formal proof given by Mises that this satisfactory explanation is necessarily an exhaustive explanation: that there can’t possibly be another, or that the explanation given could not possibly be built upon or tweaked even slightly in order to provide a more accurate understanding. Now, he might assert this about his theorem in other passages – that ‘It must happen this way. Nobody can ever succeed in constructing a hypothetical case in which things were to occur in a different way’ (Human Action, 407) – but the theorem itself doesn’t actually logically show this. Obviously if we find passages written by Pythagoras himself which make the claim that his theorem also proves bananas are orange, it would be interesting to talk about, but ultimately any attempt to use those quotes to prove the same thing is an invalid appeal to authority. And note that I’m not saying Mises attempted to show it was exhaustive and failed. The attempt really wasn’t made; it was just enough that a satisfactory explanation existed.

Let me give you an analogy to illustrate my point. This is going to be a terrible analogy, I know, but it’s the only thing I can think of, so just try to stick with it. Let us say that some alien beings are watching Earth, and for whatever reason they can only see infinitesimal time slices of very small areas on Earth every now and again. They also don’t have any control over where and when they are able to see. Now, just by luck, I am witnessed to be in location A and five hours later I am witnessed to be in location B. Now, for the sake of argument, let’s just say that this is a big mystery to these aliens. The reality that these aliens exist in – which is some sort of alternate universe with differing laws of physics to ours – is just so radically different that they haven’t even figured out that humans can travel yet. Also there aren’t any other observations of this same phenomenon; it’s just pure luck that they once managed to spot the same person in two time slices. This mystery is a big overbearing question to the academics of the alien society, until one day a clever alien puts forth a satisfactory explanation that shows how I could be in two different locations in the two different time slices. Using a new computer model of a human he developed, complete with an accurate physical simulation of our universe, it is discovered that human beings are able to manipulate their legs to achieve self-propulsion! This finally provides a satisfactory explanation! It shows that I could have walked on my two legs, just like the computer model shows is possible, from location A to location B. Later it also demonstrated by another alien that I could have indeed made it from point A to B, using walking, just inside the five hour time window required. The evidence checks out! So now it’s completely boring, and no further thought or investigation is needed, because there’s no great mystery about it any more. But this is by no means a formal logical proof that I didn’t drive in my car from A to B that day, and then decide to hang out there for the next 4 hours. The aliens didn’t make an attempt to prove I didn’t use some other method of travelling, or even that I couldn’t possibly have used some other method. It’s merely enough that they found a satisfactory explanation – one that turned the great mystery into something that was finally explainable. Not necessarily explained, but finally explainable.

This is exactly what Mises did when he leads us through the logic of his regression theorem. In his day, everybody else was missing the time element from the equation, which is why they all thought that it was a futile exercise to even attempt to explain the purchasing power of a medium of exchange in terms of its purchasing power. It is an apparently circular argument. But Mises showed that it is not circular, by explaining today’s purchasing power in terms of yesterday’s, and by regressing back through time, day after day. But then he conceeds that this only raises another question of infinite regression. But then, of course, the most obvious explanation immediately jumps out and fills the gap to finally provide a satisfactory explanation: any non-monetary utility of the monetary commodity can most obviously be invoked to stop the regression. And so it was finally explainable, but nowhere does it actually show that the most obvious explanation is an exhaustive one. I’m not saying it’s wrong – just like it wasn’t wrong that I could possibly have walked from A to B – just that it’s not necessarily an exhaustive answer, purely by going from the logic of the regression theorem presented.

Just because Mises couldn’t think of another explanation – by using, say, the logic of network effects – or didn’t even attempt to think about another possible explanation now that a satisfactory explanation finally existed, it doesn’t therefore mean that another explanation cannot exist. For instance, I don’t see any reason – using just the logic of the regression theorem – for why small groups of people cannot take up a new medium of exchange for ideological reasons, and agree to use it amongst themselves. And then feasibly, due to network effects, it can grow because new people who wish to partake in trade with this economic circle have an incentive to get involved with the new medium of exchange. See, for example, the WIR currency, which seems to me to be almost identical to Bitcoin in a lot of ways, except of course in how Satoshi managed to achieve a decentralized peer-to-peer ledger. WIR just uses a centralized ledger operated by the WIR bank:

I’m sure you’ll say that even the WIR isn’t popular enough to prove anything, and you might be right. I’m not trying to claim it as some sort of solid emperical evidence. But going back to my ideological start + network effects reasoning, I just don’t see why that would be impossible, and I especially don’t think the regression theorem shows that it IS impossible. Maybe there is a possible proof for why it is impossible, I’m not opposed to one if it can be shown, but as I have said the regression theorem as presented only provides a default satisfactory explanation in order to connect all the dots, but not a proof that the default explanation provided is an exhaustive one.

It’s also interesting given the quotes from your blog, where Mises explains the regression theorem in Human Action, and comparing it to the explanation he gives in ToMC. It seems to me with his use of language that he had grown more confident and assertive about it, during the 37 years between, even though the pure argument itself is the exactly the same. I’ll quote the relevant parts from the two below, though I’ll leave out where he introduces the time element for brevity because that’s not really a relevant part. It’s the second question that’s raised after the time element is introduced that matters here: how the regression ends.

So perhaps he was in fact overstating his case. Remember that he had all the incentives to do so, given that he couldn’t possibly imagine any new forms of money arising to emprically challenge it. So it was very safe for him to overstate his case. And really, if he was slightly wrong by overstating his possible explanation as an exhaustive explanation, does that destroy the entirety of Austrian economics or something? You give me the impression that you think it would. I find your distain for Bitcoin interesting, given that I see legitimate disagreement here. It’s not like this is creationism vs evolution or something; it’s only a small nuance.

ToMC:

But this alone will not suffice to explain the problem of the element of continuity in the value of money; it only postpones the explanation. To trace back the value that money has today to that which it had yesterday, the value that it had yesterday to that which it had the day before, and so on, is to raise the question of what determined the value of money in the first place. Consideration of the origin of the use of money and of the particular components of its value that depend on its monetary function suggests an obvious answer to this question. The first value of money was clearly the value which the goods used as money possessed (thanks to their suitability for satisfying human wants in other ways) at the moment when they were first used as common media of exchange. When individuals began to acquire objects, not for consumption, but to be used as media of exchange, they valued them according to the objective exchange value with which the market already credited them by reason of their “industrial” usefulness, and only as an additional consideration on account of the possibility of using them as media of exchange.

Human Action:

But, say the critics, this is tantamount to merely pushing back the problem. For now one must still explain the determination of yesterday’s purchasing power. If one explains this in the same way by referring to the purchasing power of the day before yesterday and so on, one slips into a regressus in infinitum. This reasoning, they assert, is certainly not a complete and logically satisfactory solution of the problem involved. What these critics fail to see is that the regression does not go back endlessly. It reaches a point at which the explanation is completed and no further question remains unanswered. If we trace the purchasing power of money back step by step, we finally arrive at the point at which the service of the good concerned as a medium of exchange begins. At this point yesterday’s exchange value is exclusively determined by the nonmonetary – industrial – demand which is displayed only by those who want to use this good for other employments than that of a medium of exchange.

So comparing the two, you can see in the quote from Human Action, that athough he was making the exact same explanation, it was more strongly worded than in the other, by saying things like: ‘yesterday’s exchange value is exclusively determined by the nonmonetary – industrial – demand’ (emphasis mine). But again, the pure logic of it doesn’t actually show that this is the case I think. It just provides a default explanation (the most obvious one possible, non-monetary demand) which is merely enough to the connect dots – for it not to be an infinite regress anymore. I just don’t see why this does actually formally prove (which is such a strong term for this little explanation, let’s be honest) that this is an exhaustive explanation for how any possible medium of exchange can be bootstrapped in any possible case. It just doesn’t show that a commodity without a non-monetary demand cannot be used purposefully as a medium of trade amongst a small group, who ideologically want to use it for such purposes, and then have it grow from there with network effects.

106

dvide,

I hereby welcome you to the forums. I read your post with great interest, and am impressed by its clarity and logical reasoning.

First the little things.

  1. I have no dog in this race. There is no ideology that makes me think bitcoin is doomed according to the regression theorem. More important, as Mises pointed out, ones motives for presenting an idea neither strengthen nor weaken the idea itself, which must be examined on its own merits, not the motives of the writer.

  2. I’m glad you bothered to read my blog and indeed understood what I was saying. Delve deeper, my son, to another post there, where I quote Mises in Money and Credit. You will see that he is just as confident etc. in that work about the consequences of his theorem as he is in HA.

  3. OK, now to the part of your post I found very refreshing and intellectually stimulating. Your argument, as I understand it, is that Mises found ONE OF MANY POSSIBLE EXPLANATIONS for the initial evaluation of a medium of exchange. It is the simplest, maybe, the most elegant, perhaps, but our man Mises has not proven that every other possible explanation is wrong.

For example, he did not disprove that perhaps aliens from another planet with mind control abilities zapped the planet at some moment and hardwired everyone to think “Gold is worth $25 an ounce.” You grant this is a silly explanation, but not one that is logically disproven by Mises’ reasoning.

Similarly, the argument that a small group decided to arbitrarily give some value to a valueless thing to facilitate trade among themselves, and then more wannabees joined the fun, until the inherently useless object takes over the world and everyone uses it as money, has not been logically disproven by Mises.

And indeed, I admit that the article I wrote, Bitcoin Takes a Beating, did not address this and neither did Mises in the section I quoted there. He polishes off all alternative explanations, Martians, etc. in Money and Credit, where he writes [and I quoted him here]:

If the objective exchange-value of money must always be linked
with a pre-existing market exchange-ratio between money and
other economic goods (since otherwise individuals would not be in a
position to estimate the value of the money), it follows that an object
cannot be used as money unless, at the moment when its use as
money begins, it already possesses an objective exchange-value
based on some other use. This provides both a refutation of those
theories which derive the origin of money from a general agreement
to impute fictitious value to things intrinsically valueless, [like those stupid bitcoins]…

There you have it. [Note that it is basically a restatement of the very problem the regression theorem tries to answer, so it’s not really some new assumption].

Now we get to deep waters. What did he actually mean in that little parenthesized phrase? I confess that until now I thought he meant one thing.

You can read this or this [don’t forget the comments], where I expand on what he meant, restricting myself to the case of bitcoin.

Or you can read on and let me lay out the syllogysm yet again:

  1. People work hard for their purchasing power, and do not like to get tricked into handing it over for something they will not be able to buy anything with.

  2. Therefore, faced with the option of being paid in something newfangled that is intrinsically valueless, or just trucking along with whatever they did until now, they will go with the latter.

  3. No Martian or religion will change this feature [=1. above] of human nature.

That’s what I thought he meant. And it may indeed be what he meant. But let me mull over another possibility. To be continued.

107

BTW dvide, can I quote your whole post in my blog?

108

Yes of course. I promise not to sue for copyright infringement :slight_smile: though Kinsella would point out how useless that promise is.

I may take some time to respond as I have a lot of work I need to be doing tomorrow, and I don’t much fancy thinking and writing up a long in-depth post right now. I’m just glad I’ve found a way to move the discussion forward, if only by an inch. But yes that part in the parentheses would be an argument made I suppose, that there is no other way to begin to estimate the value of the money. Actually I’m not sure if that’s an assertion or if it was an argument logically shown. Either way I’m not sure it’s quite right, or that, for instance, you can’t even begin to estimate the value of a bitcoin. I feel like I have already attempted to estimate the value of a bitcoin to me, and found it to be non-zero, but you would only argue that I am a fool. And we might just be talking historically here, in the context of the part in parentheses. Mises was explaining the rise of money in a time before the concept of money even existed. In that context, people obviously could not have been in a position to estimate the monetary value of a good, because they didn’t even know what money was. But now we do have the concept of money, and even in-depth economic understanding of it, so you could say that an individual can start to estimate the value of a new money good even if he just throws a semi-arbitrary exchange-ratio out there.

Historically one of the first trades, if not the first trade, was something like 10,000 bitcoins for 2 pizzas. So it does seem as though somebody was in some position to estimate a semi-arbitrary exchange-ratio of what he thought those bitcoins were worth to him, for whatever reason, even if it was just for the novelty aspect of paying for something, anything, with his bitcoins. And since then the prices have converged to something less arbitrary, that reflects the subjective valuation of more people. That could be the case, but I can’t think of a way to express my intutition on it from a non-emperical perspective so I’ll have to ponder on it a bit more.

Also I’ll leave this page from Human Action here for discussion because I think it’s interesting. Here Mises explicitly denies that the theorem is technically just a historal account rather than an apodictic one, that proves it could not happen any other way. I don’t think I agree that this is what he showed, but maybe that would get into the philosophy of science. I’m not a scientific realist, so that might account for why I don’t see it as an apodictic proof where maybe Mises did. I’m not sure if that will be a fruitful avenue to explore, but I’m not going to delve into it right now.

Sorry for this off-the-cuff reply. I can’t be bothered editing it to make it flow better and read well compared to my previous post, as I’m tired, so you’ll have to forgive my rambling reply. Just want to get something in because tomorrow I have to commit to working.

109

Smiling Dave,

as I pointed out several times already, the claim that Bitcoins are intrinsically valueless is both irrelevant as well empirically wrong. It is irrelevant because Mises only considers three alternatives (consumer goods, producer goods, media of exchange), which is a false dilemma fallacy. It is empirically wrong because you mistake anecdote for data. What you mean is that you find Bitcoins intrinsically valueless, not that it does not have a market price. Empirical data shows, as dvide rightfully pointed out, that people ascribed it value (a very low, though positive one) before it was a medium of exchange.

There are plenty of ways to rescue the regression theorem from Bitcoin, or you could just say that Mises was wrong. Your conclusion however is methodologically invalid. Also, the fact that you refuse to confront your errors is an indicator of ideological motivation. But I’m not going to fall into the same trap (false dilemma fallacy) as you. There are many other possible explanations. For example, you could be just stupid.

110

Smiling Dave,

If we go back to the great depression when there was a run on banks did federal reserve notes lose their status as money because people no longer wanted them because they believed they no longer had purchasing power? If a thing ceases to be money because people no longer believe it has any purchasing power how does the regression theorem account for federal reserve notes becomming money again? The reggression theorem is absent force. However force is the reason federal reserve notes have purchasing power. Whereever force rears it’s ugly head it is met by it’s counterpart resistance. Resistance is the phenomenon I attribute to bitcoin.

Regarding 2+2=5.

2 (2 in base 10) + 2 (10 in base 2) = 5 (12 in base 3).

2+10=12 == 2+2=5

111

Well, this is debateable. One could also relax the conditions of a physical commodity and allow for all kinds of “strange” goods. For example there is an article Fiat Money as Administrative Good by Kuznetsov (I’m too lazy to look up the URL, but it was featured as Mises Daily and also published in one of the journals that specialise in Austrian Economics). It claims that fiat money can rescue you from goverment using guns on you, so it’s a type of good. You can do the same with Bitcoin and claim that the ideological and/or speculative background is an unusual good, and this created the starting price, before Bitcoin was a medium of exchange.

112
  1. As promised, here is the other possible interpretation of Mises’ parenthetical statement, which, he claims, destroys every other explanation for the origin of a money. Let’s first quote him again.

…the objective exchange-value of money must always be linked
with a pre-existing market exchange-ratio between money and
other economic goods (since otherwise individuals would not be in a
position to estimate the value of the money)…

You can scroll up to here for one explanation of what he meant.

Here is another, shamelessly copied from what people wrote here a few months ago. And I quote:

JJ: does a money really have to have non-monetary value, and if so, why?

Smiling Dave: It does, because otherwise it’s price, say $17 per bitcoin, is basically a fad. Meaning that’s what people are willing to pay now, but there is no guarentee they will be willing to pay that tomorrow, because there is no reason for that price. Why is the price $17, and not $10, or ten cents?

People sense this, and at some point will start to worry. They will want to unload their bitcoin for something substantial. They will refuse to accept it as payment. Sooner or later, everyone will lose faith in the other person being foolish enough to accept a bit coin in exchange for $17 worth of hard work and tangible goods. They themselves will also not be willing to accept a gamble in exchange for their hard work. The downward spiral will begin.

  1. Live Free,

You wrote:

If we go back to the great depression when there was a run on banks…

did federal reserve notes lose their status as money…

because people no longer wanted them…?

People no longer wanted them? Then why did they run to the banks? To get free toasters?

Your equation about 2+2=5 is also falacious. Ask someone who knows math.

113

Smiling Dave,

whether you like it or not, there is a market price for Bitcoin. In other words, its objective-exchange value is linked to other economic goods. This allows individuals to estimate its value. While this does not mean that Bitcoin is money (indeed, that would be a logically invalid argument), it can’t by any valid logical step mean that Mises disproves Bitcoin. To claim this is a logical fallacy. To put this into an abstract form, Mises claims “if A, then B”. We know that empirically A is true. Since A is an empirical datum, not a result of deductive reasoning, there is no way to derive from this that A is false.

Whether Bitcoin was valued before it was a medium of exchange, and therefore whether Mises was right or wrong, is of course open to interpretation. Both Murphy and me have presented several possible conclusions.

114

1… there is a market price for Bitcoin…

Everything has a market price. My autographed toenail clippings, for example, can be bought on my website at $1,000 a clip. The cult I’m starting will require all its members to buy them. So what?

  1. … In other words, its objective-exchange value is linked to other economic goods…

No. Go to Theory of Money and Credit, Part two, Chapter 7, and you will see that “objective exchange value” is something that only a money has. Bitcoin is not money. My toenail clippings, valuable and magical and scarce as they are, are not yet money. Neither bitcoin nor my toenail clippings have objective exchange value.

3…This allows individuals to estimate its value…

No. It allows them to know how much they will have to PAY for a bitcoin [or my toenail clippings], but not how much they will GET if they try to unload their bitcoins [or my toenail clippings] in a week or two, not to mention six months from now. See next point for more about this.

4. In the news, AKA how serious people view bitcoin:

Paxum Ends Association with Bitcoin Exchanges## The virtual currency’s volatility and uncertainty are the stated reasons why Paxum’s banking partners demanded the cessation of any association with Bitcoin.By Tom Hymes

Feb 13th, 2012 05:26 PM

CYBERSPACE—In a GFY thread posted up Saturday, Paxum announced that starting immediately it would cease working with any companies using virtual currency Bitcoin. The decision had been forced upon the global e-wallet and money transfer service by its banking partners, the company said.

“This was not an overnight/impulsive choice,” posted Ruth Blair for Paxum. “We had been in discussions with our banking partners, Mastercard and our auditors for the last couple of weeks, and on Friday our banking partners ended the discussions with us and stated that it was too much of a potential risk to continue doing business with Bitcoin and Bitcoin Exchangers and instructed us to close all Bitcoin-related accounts. We had no choice but to follow those instructions and therefore, all Bitcoin associations were severed on Friday.”

Paxum did not use Bitcoin as a currency itself but did allow Bitcoin exchanges to use Paxum as one of their payout options. As of Friday, that option was no longer available to them.

According to Betabeat.com, Paxum started working with the exchanges about a year ago. “Paxum hooked up with leading Bitcoin exchange Mt. Gox in December 2010, major Bitcoin exchange Tradehill in July 2011, and more recently with BitInstant, a service that speeds up Bitcoin transactions by fronting customers the credit, and others,” reported Adrianne Jeffries for the site.

Though Paxum declined to state which banking partners had ordered a halt to any affiliation with Bitcoin, Blair said in the GFY post that “Paxum was not hacked by any Bitcoin user(s), and we have not encountered any fraudulent activity with Bitcoin and Bitcoin-related accounts."

Of course, if you think you are smarter than they are, go ahead, be my guest. Buy bitcoins.

  1. Guys I’m tired. No more bicoin stuff. Read my blog, check my previous posts scattered on this wonderfull forum. I’m not gaining anything by repeating or linking to the same ole stuff. Let the readers decide the merits of my case based on the existing body of work.

Here are a few clues to guide you:

Some people here will try to confuse the issue any way they can. This will include introducing red herrings, misuse of technical terms, ad hominems. So look up any phrase they mention, and don’t assume they know what they are talking about.

Others are in arrested development and cannot use logic. [TY Jacob, for that timeless phrase].

[Waves to all].

115

Are you suggesting they went to banks because they wanted to hold onto federal reserve notes? It is said federal reserve notes were money because they had an exchange rate with specie which regresses back to a comodity. During the bank holiday specie redemption for federal reserve notes was outlawed and a brand new currency, federal reserve bank notes, circulated along side federal reserve notes. So how does a federal reserve bank note, with no exchange rate to any commodity, obtain value equal to a federal reserve note? Force…

Am I to presume you do not know math therefore I should not ask you despite that you deem it falacious? The whole original comment was an exercise of perception. I don’t really feel like going off the deep end into the truth of “one” in a dimensional context. I simply remarked anything is possible if people believe it. I can think of a several things that were believed to be impossible before they became possible. If something is considered impossible by many people are the actions of the person who believes it to be possible irrational? It ties into the same thing we were discussing earlier. How many witnesses does it take before something becomes a fact.

116

Smiling Dave,

  1. Market price is where demand meets supply. It’s not decided arbitrarily by one side as your toenail clippings. So your example is a failure and a fundamental economic error.
  2. In your own reference, Mises says that “objective exchange-value” is purchasing power. It is what other people are willing to give you for it. As I explained elsewhere, Mises uses the same concept to define “objective exchange-value” as is present in the definition of externalities, in that utility is influenced by other people’s actions independently of the utility derived from your own consumption. All valuations are subject to externalties, merely in most cases they can be ignored because they are too small. The error in your claim becomes more apparent when you read, for example, the German edition, or books by other economists (Mises’ predecessors or successors).
  3. You are misrepresenting “objective exchange-value” for the absence of volatility. I can’t see any explanation from you why there is should be a relationship between the two.
  4. Paxum’s decision came due to uncertainty and costs associated with the regulatory situation. For the same reason GoldMoney suspended the ability of inter-user payments in January. But while GoldMoney is a centralised system and their decision has an absolute effect (i.e. it makes the use of GoldMoney as a medium of exchange impossible), with respect to Bitcoin it only has a quantitative effect on the liqudity by having one service provider less. Direct Bitcoin transactions are unaffected by this. Which is another indicator that Bitcoin has an advantage over gold or fiat. It also cannot be deduced what exact effect this will have in the long term. As economists know, the price during prohibition or heavy regulations can be driven up if the elasticity of demand is low. On the other hand, you can contrast this with the situation about Bitcoin in Australia, where the financial regulator said Bitcoin is unregulated.
  5. You still have only addressed a minuscule amount of the errors that were pointed out by me (or others). And since the basis of your “theory” is that bitcoin is “stupid”, maybe you should show a bit more restraint about complaining about ad hominems.
117

@thread

  1. are t-bonds money?

  2. if a tribe on a remote island uses cowry shells as a primary medium of exchange (and as jewelry) and starfish as a less-preferred medium of exchange (and for rituals involving starfish), and I jetski out there in an aborigine disguise with a tortoise shell full of cowry shells, and attempt to buy the island piece by piece, but they figure out what I am doing and the exchange rate of shells:starfish flips the other way and keeps going…does this mean that cowry shells are not money, or that they were not money, or that they will return to being money once I leave?

  3. assume a tribe of gnomes that have perfect memories; are able to forget things completely, selectively, and verifiably; and love baked goods. Also assume that the intersection of chemistry and gnome preferences makes the invention of a successful recipe for cookies nontrivial. If these gnomes use memorized and forgotten recipes as a medium of exchange, would that make the recipes money?

  4. assume a computer scientist develops an algorithm that can spit out any digits of pi selectively (as in “give me the 6 millionth digit to the 8 millionth digit”) and accurately in a brief span of time. He also develops an algorithm that can verify the accuracy of digits but not produce them. Suppose he kept the first algorithm secret, made the second one public, released the first 25 million digits to pi to the public and then sold ten 10-million-digit-blocks-of-digits from 1 trillion digits and higher. And the artists and collectors and computer scientists who considered themselves to be the exclusive posessors of these parts of pi traded them amongst themselves according to their rising and falling fortunes, and one guy even bought a house with 30 million digits. Well the guy who sold the house for the digits was a very wealthy, very well-educated man. He was also quite literate, and loved art and math. He actually collected all ten 10-million-digit-blocks, and hired a struggling painter to paint all 100 million digits on a giant canvas. No one knows how, but he did it. Now I direct your attention to the canvas and I ask you…wait, I am forgetting something.

the painter was actually the great-grandson of painter you have probably heard of, the founder of the impressionist school, Claude Monet.

so now I direct your attention to the canvas, and I ask you…is this a Monet?

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  1. have you read HA, the section about this stuff?

  2. are you asking if people will still use them as media of exchange if they become very common, like zimbabwe dollars?

  3. see 1.

  4. is your point that a photogragh of a hot dog is not as edible as a hot dog?

  5. why do I feel these are socratic devices?

119

  1. Yes, they are fiduciary media?

  2. No, I am asking if they were money before I arrived, or if they were still money when the value crashed, or if they will return to monetary status when I leave?

  3. Gnomes are not human. Also, which part addresses this?

  4. no, this was half joke and half a point about the arbitrary nature inherent in assignation of meaning to phoneme.

  5. I actually didnt expect you to reply, as it seemed you had decided not to discuss bitcoins further. But my questions are socratic in that I intend to bring the discussion forward.

120

Bitcoin does not contradict the Regression Theorem.

First, the original use of Bitcoin was found in a barter market - Silk Road.

Second, information is a discrete non-material substance that can, and often does, have value.

In fact, the primary reason that labor alone does not create value is that labor must be combined with materials and guided by timely information to produce goods and services of value to the market.

The primary contribution of management to the final value of the products of their industry is the “information” they bring to the process.

A bitcoin is a discrete block of information that has unique properties:

  • It can be transfered from Alice to Bob (P2P transfer)

  • It can only be transferred once, after which a new Bitcoin is created and the old one added to the spent coin file.

  • It is difficult to trace

  • Unlike a gold-backed system It does not require a connection to meatspace (the physical world)

  • It is scarce and difficult to make more, on a difficulty level comparable to that of gold (which is increased through mining).

Ironically, the primary value of Bitcoin is a reaction to the Welfare State’s controls on money. Bitcoin arises as more useful than gold for the purpose of making trades prohibited by the State. This is why Silk Road was the first marketplace to find a use for Bitcoin as a medium of exchange.

In an era of State control over almost everything, Bitcoin is extremely useful. As the “unofficial sector” grows, the usefulness of Bitcoin will grow.

If the Welfare States eventually go bankrupt and fall apart against the realities of the information age, and the forces of decentralization, then they will probably be replaced by less restrictive states that do not have the resources to expend on control of financial transactions and other minutia.

As statist control over monetary transactions decreases, the utility of Bitcoin will decrease, but if by that time Bitcoin has achieved universal usage, then its primary value will not be its ability to bypass monetary controls, but its universality and scarcity.

At any rate, the Regression Theorum holds true for Bitcoin, but you have to realize that information, and not merely commodities has value. Bitcoin may be the first universally tradeable form of information.

Therefore, even though Mises did not forsee a fungible type of information that could be traded and not forged, Bitcoin does have the commodity value of pseudo-anonymity and scarcity that make it very useful in its own right in an era of statists controls over money.