Does Mises's Regression Theorem Require a Minimum Population Size?

Economics Economics Questions
21

A random thought I had - with two people:

One person (A) produces shiny red rocks, the other person (B) produces shiny blue rocks. Both of them also consume their product and wish to continue to consume their product. They also produce other products.

They engage in direct exchange with eachother for eachother’s products. Now A anticipates that for some reason B’s blue rock mine will be depleted and so he will be unable to produce shiny blue rocks. For this reason, A stocks up on shiny blue rocks by trading with B. Then, when the source of blue rocks is cut off, A sells them back to B in exchange for other products B can produce.

Does this qualify?

22

Do more thinking.

Is this direct exchange or indirect exchange?

What I see is that I think you are just trying to substitute a different definition of “indirect” in that Person A trying to anticipate how Person B will value the rocks in the future, thus “indirectly” stockpiling rocks to trade for potential future goods with Person B.

23

I am with Tex on this one in that it is still a direct exchange. No goods are changing hands where the recipient of the goods has no intention of consuming them but rather using them later in another exchange. Since stockpiling doesn’t involve an exchange, the guy hording blue rocks isn’t using them as money but rather just stockpiling something he believes will have an increased future value. The same way I may stockpile food and water so I can sell it to my neighbors during the zombie apocolypse. I am not using food/water as a medium of exchange, just as a store of value.

24

“No goods are changing hands where the recipient of the goods has no intention of consuming them but rather using them later in another exchange.”

What? That is exactly what A is doing with the shiny blue rocks.

25

So both of them enjoy their own rocks, and enjoy the other person’s rocks. There will be a point where they would stop trading the rocks with eachother. Person B will reach a point where he would not trade away any more of his blue rocks… unless the price changes (which would most likely occur when Person A begins digging up more and more red rocks). But this would just lead to another direct exchange between the both of them until both are satisfied (equilibrium).

This makes it slightly more complex, but the logic is still the same. I would recommend going back and reading on the basics just make sure you have the logic down correctly. I believe Bob Murphy does a pretty good job of this in “Lessons For The Young Economist”:

http://mises.org/resources/5706/Lessons-for-the-Young-Economist

As I mentioned above, this is just the prices changing, and I think a little bit of substituting or confusing definitions of indirect (as I mentioned in my previous post).

26

At the point of that exchange it’s a direct exchange, not an indirect exchange. A is collecting blue rocks and consuming red rocks. A then exchanges blue rocks to B, this is a direct exchange. The only point I am making here is that there is no indirect exchange, only direct exchanges.

That being said, it would be an indirect exchange if A purchased blue rocks from B so he could sell those blue rocks to B later. The first exchange would be indirect, the second direct.

27

“That being said, it would be an indirect exchange if A purchased blue rocks from B so he could sell those blue rocks to B later.”

That’s what I said…

EDIT: Perhaps the answer is that there must be >1 persons, >1 of which can offer >1 good/service for trade.

28

No, even you are confusing definitions of indirect. The first exchange would be a direct exchange:

Person A trades rocks to Person B. Let us say we both have 100 rocks. We both trade 50 to eachother. Now Person A digs up more red rocks. He trades again with Person B at some other exchange rate (depending on how much Person B prefers red rocks to blue rocks). They will continue trading until they are satisfied, Person A will dig more red rocks, they will trade again until they are satisfied, and on and on and on.

There will reach a point where Person B likes his remaining blue rocks more than all the red rocks Person A has (or to look at it another way, the Oppurtunity Cost for Person A will become so large it would not be worth it to dig more). At this point there would be no more benefit in trading red/blue rocks, and they would move on to trading other goods.

You are imagining multiple direct trades over time, and (potentially) changes in preference. This is just changing of prices (over a period of time), and NOT indirect exchange.

29

The idea was that A wants red rocks and B wants blue rocks. A has no desire to collect blue rocks and B has no desire to collect red rocks. This means that anytime A accepts blue rocks (something he has no desire for) it is solely for the purpose of future purchasing power (medium of exchange). The inverse is true for B accepting red rocks (which he has no desire for outside a medium of exchange).

I will admit, this scenario is a bit contrived but I think technically, it would be an indirect exchange if A accepted blue rocks or B accepted red rocks since part of the exchange consists of a good the receiver has no value of beyond a medium of exchange.

30

Rothbard: “The tremendous difficulties of direct exchange can be overcome only by indirect exchange, where an individual buys a commodity in exchange, not as a consumers’ good for the direct satisfaction of his wants or for the production of a consumers’ good, but simply to exchange again for another commodity that he does desire for consumption or for production.”

In my scenario person A buys a certain quantity of blue rocks, not as a consumer’s good for the direct satisfaction of his wants or for the production of a consumers’ good, but simply to exchange again for another commodity that he does desire for consumption or for production.

EDIT: Tex, I’m not sure at what your other criticisms are aimed - all that matters is that A trades red rocks for blue rocks so that he can then trade blue rocks for another good. I brought up that B would lose his supply of blue rocks (due to the closure of his mine and his own consumption of the rocks) to give an explanation of why A might buy blue rocks for indirect exchange. I added other elements (e.g. that they both consume each kind of rock and trade with eachother for eachother’s product) so that was less contrived.

Also, I agree the problem is in the definition. Going on what Rothbard says there, my scenario contains indirect exchange - but perhaps it cannot be said to have a common medium of exchange, since only A uses the blue rocks for indirect exchange. I’m still not sure.

31

“Yes, two people have their own subjective preferences, and they could trade goods with eachother which would result in prices, but not a money (which can only arise through indirect exchange).”

I would agree with you but the only purpose to the trader to own the rocks is to exchange them. They become a medium of exchange and therefore can be considered a money.

32

Will work with one rock lover, will work better with many rock lovers.

33

This is all well and good, but the definition itself implies three actors. If I could horde an item of anothers to trade back to him at a later date, I could also mine his type of rocks solely for the purpose of trading.

If that’s indirect exchange, then there is no direct exchange.

You need at least three actors or the term just isn’t useful.

And Mises’ Regression Theorem could be applied to any currency whose purchasing power far exceeds what it would be expected to achieve if introduced into a free market absent any tampering. Since “excessive” subjective valuations can’t occur between two people, nor can currency exist, at least three people must be involved to apply the Regression Theorem.

34

Menger versus Mises and Rothbard on how money works

http://www.youtube.com/watch?v=BnTxrcvp-1A

Article at: http://nielsio.tumblr.com/post/25583537960/menger-versus-mises-and-rothbard-on-how-money-works

35

Neilsio,

What makes you think Mises and R. forgot about legal tender laws? Mises mentions them in 6 places in HA, Rothbard in one. [I’m going by the indexes to their books].

Are you saying that the added value a money has, besides its intrinsic value, only stems from legal tender laws?

I offer wampum as a counterexample. Wikipedia seems to be saying its value was not dependent on legal tender laws always and only:

Currency

When Europeans came to the Americas, they realized the importance of wampum to Native people. While the Native people did not use it as money, the New England colonies used it as a medium of exchange. Soon, they were trading with the native peoples of New England and New York using wampum. The New England colonies demonetized wampum in 1663.[9] Meanwhile it continued as currency in New York at the rate of eight white or four black wampum equalling one stuiver until 1673. The colonial government issued a proclamation setting the rate at six white or three black to one penny. This proclamation also applied in New Jersey and Delaware.[10] The black shells were considered worth more than the white shells, which led people to dye the latter, and diluted the value of the shells. The ultimate basis for their value was their redeemability for pelts from the Native Americans. As Native Americans became reluctant to exchange pelts for the shells, the shells lost value.[11]

Their use as common currency was phased out in New York by the early 18th century. Shinnecock oral history ascribed the wampum market demise to a deadly red tide that decimated the whelk and quahog populations.

With stone tools, the process to make wampum was labor intensive. Only the coastal nations had sufficient access to the basic shells to make wampum. These factors increased its scarcity and consequent value among the European traders. Dutch colonists began to manufacture wampum and eventually the primary source of wampum was that manufactured by colonists, a market the Dutch glutted.

36

And Mises’ Regression Theorem could be applied to any currency whose purchasing power far exceeds what it would be expected to achieve if introduced into a free market absent any tampering. Since “excessive” subjective valuations can’t occur between two people, nor can currency exist, at least three people must be involved to apply the Regression Theorem.

So many errors in one little paragraph.

37

Smiling Dave,

>What makes you think Mises and R. forgot about legal tender laws?

They forgot about them in relation to valuations in indirect exchange. The fact that they think they need to answer the question of ‘regression’ (of circularity) at all means they’re not thinking in terms of speculation on direct use, which is where you would describe the power of legal tender laws.

>I offer wampum as a counterexample. Wikipedia seems to be saying its value was not dependent on legal tender laws always and only:

What you quoted is riddled with legislation. On top of that, Wikipedia says: “Wampum are traditional sacred shell beads”. To consider something sacred means you value it as a consumer.

And then it says: “As Native Americans became reluctant to exchange pelts for the shells, the shells lost value”. If anything, all this seems to illustrate my (and what I think is) Menger’s theory.

38

What you quoted is riddled with legislation.

A Swiss cheese is riddled with holes, but it’s not 100% holes. The story of wampum is riddled with legislation, but it served as money when there was no legislation, too. Thus legal tender laws can’t explain those parts.

On top of that, Wikipedia says: “Wampum are traditional sacred shell beads”. To consider something sacred means you value it as a consumer.

As a consumer to consume, but the article says explicitly that the Indians did not use it as a medium of exchange with each other. After all, Mises posits, [unlike what the bitcoin crowd seems to think he said], that all money has to begin with value to consumers. So there is no contradiction to Mises there. And of course, I doubt the Dutch settlers would give it any value as a sacred bead, as consumers. They had other sacred knick knacks. And yest, as time went on, those things started being worth something to the Dutch as well, even when there were no legal tender laws about them.

And then it says: “As Native Americans became reluctant to exchange pelts for the shells, the shells lost value”. If anything, all this seems to illustrate my (and what I think is) Menger’s theory.

Not sure what you see here. It conforms to Mises’ theory as well. If anything, it might contradict your theory, if the legal tender laws where still in effect when this happened.

Maybe I’m missing something. I understood your theory to be that money starts off as a commodity, then acquires more value when legal tender laws give it usefulness. I’ve heard Austrians [=Peter Schiff] say that legal tender laws give value to otherwise useless stuff, if only because you need some of it to pay your taxes. So the way i see it, Mises would agree that legal tender laws have a part in giving stuff exchange value above and beyond their intrinsic, industrial value.

But he seems to say that legal tender laws are sufficient, but not neccesary, to do that. The extra value can arise with no legal tender laws at all, merely because the commodity became popular as a medium of exchange. And my understanding is that you disagree with that. No legal tender laws, no washee. Andthe history of wampum seems to deny that.

I wonder also about cigarettes in prisons, which it seems is used as money there. Maybe some unfortunate with experience can tell us if the value of cigarettes was more in prison than in the outside world. If yes, they would also be a counterexample.

39

Best. Counter. Ever.

40

You seem to be actively trying to destroy your own credibility in this subject matter.