Circular reasoning. Same as above.
Quick addendum: Note that the regression theorem applies. In order to become money the rock has to have some value to begin with, like being shiny and pretty to look at. It doesn’t matter if it’s a huge amount of value (it probably won’t be) and the rock will acquire more value when it becomes apparent that everyone on the island accepts it.
It’s not my reasoning that circulates, it is money that circulates. 
Just like in every other pyramid scheme. The believers buy/hold the coupons because they believe there will be more and bigger suckers in the future to whom which they can unload them. The unbelievers refuse to accept them because they believe exactly the same as the believers do but are unwilling to take the risk that they may end up being the last suckers holding the bag.
A persuasive dude could start a sect/movement/commune tomorrow and convince his herd to exclusively use sealed and stamped jars with his farts in them as money. Doesn’t mean anyone else would ever accept them as anything of value in an exchange. Would this scenario disprove Mises’ regression theorem?
My No Arbitrage Theorem states that $10 bills would/should exchange for exactly TWO $5 bills on the market. If dozen morons happen to accept a single $5 bill in exchange for a $10 bill, would that disprove my theorem?
In the Ithaca Hour thread I mentioned the problems inherent in every theory/theorem about markets and human behavior. There will always be islands of stupidity and irrational blind faith within humanity that would seem to falsify it, unsustainably so. On the other hand, Keynes concluded that – sustainability, rationality, logic, or plausability notwithstanding – we’re all dead in the end.
EDIT: Did USSR and North Korea prove that no such thing as the Calculation Problem exists?
I don’t see how the second part proves the first.
I’m really not sure you want to go there. I guarantee you I could take a diamond and get a piece of bread for it somewhere even today, not on a deserted island.
Replace the word “rock” with “gold”, “wood”, “television”, “painting”, “fork”, “automobile transmission” or any other “non-consumable” and tell me that makes sense.
And gold, diamonds, arrows, scissors and any other non-contract good does?
I don’t see how my description of Smiling Dave’s circular reasoning relates to what you just said.
We’ve been through all this. If you have something new to say, have at it.
I just did. If you have something relevant to say, say it.
Um. Noooo…you said basically the exact same thing you said in the other thread. Some of it verbatim. Have a look:
Here you said:
I could have a “No Arbitrage” theorem stating that a $10 bill would/should exchange for TWO $5 bills in the market. If a dozen morons accept SINGLE $5 bills in exchange for a $10 bill, would that disprove my theorem?
And then just a few posts ago you said:
My No Arbitrage Theorem states that $10 bills would/should exchange for exactly TWO $5 bills on the market. If dozen morons happen to accept a single $5 bill in exchange for a $10 bill, would that disprove my theorem?
And the rest of that second post was an envoking of bastaio’s pyramid scheme drivel and a rewording of what you said here. So again, if you have anything new to add, that’d be great, but I don’t consider simply copy and pasting what you’ve said in other posts and combining it with a paraphrase of yet more posts anything “new”.
JJ, addressing either the “old” or the “new” one would be more helpful than comparing the two, IMHO.
Nielsio,
Funny you should refer to circular reasoning, because that is exactly what you are doing. You are assuming your conclusion. I have clearly shown that there are goods which are subject to network effects and have a utility without being consumable, and on a free market, they outperform other goods. You insist that this is not the case, and your only “proof” is a reference to what other people said.
Your original picture is misleading, because you only consider consumption to being able to increase utility, while a trade would not do that. Different modes of trade have different utilities. If the utility difference between trading in Bitcoin and the alternatives is greater than the utility difference in consumption between “consuming” Bitcoin and consuming the alternatives, the person whos utility we are assessing will use Bitcoin for trade. Due to network effects, after passing the critical mass, the utility difference between trading in Bitcoin and trading in alternatives will be greater than the utility in consumption of the alternatives alone, and then the whole objection would become pointless.
Of course, there are plenty of open questions, like what is the critical mass, can it be reached, does trading in Bitcoin really have advantages against trading in the alternatives, and so on. But these are all empirical questions and the answer cannot be praxeologically deduced.
Why is a margarita consumable and a rock not? What if the other guy does not like margaritas and there are no other rocks on the island? You are making too many unsubstantiated assumptions. I have a question to the island example. If the two people wanted to communicate, is it likely that they would they end up with a common language even though the language would have no other utility than facilitating communication?
I’m sorry, but has this been debunked yet? Because everybody seems to be talking as if it has.
I’ve made a youtube video out of it.
Nielsio, you claim currencies with no intrinsic value derive their spending power from the fact that governments only accept that currency as payment of tax. If you don’t pay tax the government will send some people to your door and make your life miserable. People doesn’t want to be miserable so they want at least enough of the currency to pay their taxes. That way the government ensure there will be some demand for their currency.
I agree with that, however, isn’t it more accurate to say the currency derive SOME of it’s spending power from the tax requirement. It’s true that creates some demand, but that doesn’t mean there can’t be other incentives that create demand!?
In the end, doesn’t it come down to whether people accept bitcoin in return for other items, as long as they do (for whatever reason) there will be a demand for them.
Gold has intrinsic value because it has some properties that is useful in e.g. the electronics industry. (Although once upon a time it’s only value was as a display of wealth, i.e. as jewelry.) A bitcoin isn’t just something rare, it’s something with a lot of attractive properties (for a currency) that other rare things (e.g. gold and dollars) doesn’t have. Doesn’t these properties, that makes it useful as a transaction medium, give it some intrinsic value?
As an analogy, if you build a first floor, you can build a second and third floor on top of it. But you cannot build a second and third floor without first building a first floor.
Read Human Action, Chapter 17, section 4 to see why this analogy is apt. Mises there recognizes the point you make, that after something becomes currency for a good reason, it can gain more value by the fact that it indeed is now a currency. But he presents his argument there, called the regression theorem, that something cannot be a currency without first having usefullness and value outside of trade.
Do a search on my blog for bitcoin, where it’s all spelled out in simple language.
@Sam Armstrong: Pretty slick presentation, do you do this kind of thing professionally? If not, you should consider it.
The trouble with suggesting that Bitcoins have some kind of “fallback use” as captchas is that this already exists (hashcash) yet the market seems to be going in the direction of image-based captchas for whatever reason. In addition, the fact that the potential future use of Bitcoins as captchas is a very low value (potential) use cannot simply be waved off. If you are holding 10 Bitcoins ($143 as of today), the fact that these might be useful someday in order to send 10 emails if someone develops and deploys a Bitcoin-based hashcash system and the person you’re sending email to happens to use Bitcoins as the spam-filtering system is very little incentive to hold on to your Bitcoins if a flash crash happens as happened on Mt. Gox a few weeks back. As the value in a crash drops to $5, $2, $1, the incentive is “get out now” because even $1/Bitcoin is a hell of a lot more value than the above-stated use as a hashcash.
Clayton -
Thanks for the reply, I did take a look and there was a nice post about what I was asking before. So the answer in that post is this:
So lets substitute gold for bitcoin, and jewelry-trinket for geek-libertarian-toy-currency-trinket. The regression theory as you explain it doesn’t say bitcoin will fail, it only explains how the snowball started rolling in the first place… Bitcoin had some tiny novelty value to some people, people are donating computer power to mine them, and people are slowly starting to use it as a currency (because it has great “currency properties”), demand increases and so it gains even more value, just as Mises predicts.
What you claim here is that bitcoin is going to suddenly LOOSE value because people will suddenly realize they can’t eat them (yet you can’t eat gold either), you only explain that there will always be some demand for gold and other fiat currencies for different reasons.
I don’t think the bitcoin value is going to suddenly plummet, sure the rate will fluctuate, and maybe bitcoins will suffer from some instability especially in the beginning, but simply put: If I bought a bitcoin for $15 I won’t sell it for $14 unless I really, really, had to. The same is true for gold, gold prices fluctuate, and in the end it only has novelty use (or use in industry for novelty goods) etc… So maybe I’m a fool, but as long as there is a bunch of fools that think bitcoins are neat they will have some tiny value, just like gold and diamonds. (I realize they don’t have novelty value to you and many others, just like diamonds has no value to me, but there only has to be some people that like them enough to get the ball rolling).
So what am I missing?
I’m still worried that the encryption scheme will turn out to be less secure than what bitcoin people claim, or that something unexpected happens making bitcoins less useful, but I’m not convinced about the argument against bitcoins presented here.
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Glad you read the blog post and that it clarified things a bit.
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Next step: read the comments on that blog post, also first post and the two verified answers here: Does the Ithaca Hour Disprove the Regression Theorem? Hint: Which one word of this quote from your post is the weak link: “…Bitcoin had some tiny novelty value to some people…”
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Finally, there is a flaw in the reasoning when you write, “The regression theory as you explain it doesn’t say bitcoin will fail, it only explains how the snowball started rolling in the first place.” Hint: reread the analogy in my previous post here about building a three story house.
@smiling dave: Again you’re implying that the regression theorum requires that all money must start off with non-trade use. Marten’s concern, which I share, is that it’s not obvious why this is so.
The house building analogy would only be relevant if it was true that all money must have (and keep) a non-trade related value. Even Mises acknowledges that it need not be the case that money, once having gotten started (as bitcoin clearly has), keeps on being valued for non-trade uses.
So as far as Bitcoin is concerned, the regression theory is moot, the transition it’s designed to explain has already happened.
Furthermore, it is not supported by empirical evidence. See for example http://en.wikipedia.org/wiki/Rai_stones which never had consumption value (apart from aesthetic, similarly as can be said about Bitcoin)
The main problem I see in the argument is the implicit assumption that money is a separate praxeological category. I have not seen an explanation why it should be so. Without at least one of the following:
- money is a separate praxeological category (implicit never explained claim, I can’t see any difference between money and network effect in general)
- the utility of trade conducted in a specific currency is only influcenced by the size of market share of that currency and its consumption value. This plainly wrong, since the acts of trade are not homogeneous, rather have different speed, transaction costs, legal status and requirements, cost of holding the currency and protecting it and so on. Even Mises and Rothbard confess that some goods are better suited for trade than others. So if you rank the utilities of the options, according to regression theorem proponents, a trade in a currency which has no consumption value must have an “equillibrium rank” always below one that has some. Even if we reject the mathematic approach of adding the utilities (since you can’t add heterogeneous variables), it still does not follow that this is true. In fact, rejecting the mathematic approach should make the gap in the argument more apparent. The acts of trade versus the acts of consumption are heterogeneous, you cannot compare them with each other. Just like consumption has utility, trade has utility too.
the assumption that a non-zero consumption value is necessary cannot be deduced. Furthermore, the “regression theorem proponents” never explain whos consumption value is relevant, how many potential consumers are necessary, if speculative or aesthetic value is sufficient, and so on. It’s a badly phrased and confusing claim.
bitbutter and Peter Surda: I can do no more than point you in the right direction, having written all I have to say on the matter. I only bothered doing so with marten for I sensed he was [possibly] honestly seeking knowledge and seemed to [possibly] have the intellectual capacity to find it. I’ll do the same for you both, and hereby direct you to the same places I pointed to marten in my last two posts. Bitbutter, you certainly have an initial advantage over Mr Surda, who does not distinguish between “non trade” and “consumption”.
I am not sure what the problem here is exactly. As Jakob said on another post, most people are in arrested development and cannot use logic. Let me add that some people are intellectually dishonest, having made up their minds before the evidence is in for various reasons, and thus consciously or unconsciously toss all rational thinking aside.
Smiling Dave,
in the past, I have come to realise that the best way to determine whether people’s interest in a debate is genuine is their propensity to address objections. My objections have not been addressed.
Like here:
Either I do not understand what you mean by this, or it actually confirms exactly what I’ve been saying since the beginning. Obviously, you can have “non-trade value” without consumption (as clearly shown on examples of languages, standards, difference in utility among payment methods and so on). The “regression theorem proponents” often however use these interchangeably.
Recently I discovered that socratic method can releveal the opponent’s arguments (or their unwillingness to debate) much faster than an attempt to formulate my own thoughts. So I’ll apply it here too. I would greatly appreciate it if people who disagree with me could answer some of the following:
- Is money a separate praxeological category? If yes, how exactly?
- What is the praxeological difference between money and other phenomena subject to network effects?
- How many people do have to find non-monetary use for a phenomenon for it to be classified as money?
- Does speculation and aesthetics count as non-monetary use?
- If the government uses force to promote a specific currency, is that currency money?
- If the government uses force and prevents money from satisfying all market participants, will the market use non-money as a substitute?