It is symptomatic that trolls like Smiling Dave, instead of arguing, just make stuff up and ignore the opponent.
At the moment, Bitcoin would not be pitched to a carpenter as a new currency, but as a new payment system, say a replacement for debit cards. If he started accepting Bitcoin payments, he would probably still choose to continue to receve dollars (or euros or whatever). This is possible, because as I said many times over, Bitcoin decreases transaction costs. Payment processors like Bit-pay already offer services like this, and many others are in development. I suspect that soon, open source middleware that does not have vendor lock-in will appear, and will contain api access to all major exchanges and other services like Bitinstant or Bitcoinica. Maybe the projects already support this and I just missed it, because there’s always something new in Bitcoin every day. Eventually, it may or may not spread to such an extent that conversion to fiat will become unnecessary.
Such a user would not show up in the technical analysis of the Bitcoin network nodes, because it’s the payment processor rather than the user that is accessing the network. However, the payment would contribute to the transaction volume, increasing the velocity.
You still do not understand how money (or for that matter, anything) works.
Money is not necessarily monopolistic, it is merely subject to the network effect. Furthermore, the competition occurs on three levels: unit of account, store of value, and method of exchange. This dichotomy allows for hybrid payment systems, which results in these levels influencing each other bidirectionally. A method of exchange that decreases transaction costs can then affect the choice of the store of value and the unit of account. Bitcoin is ideally suited to utilise this dichotomy to its advantage.
The traditional Austrian literature conflates these three levels.
GoldMoney is no longer a competitor to Bitcoin. Exactly as I said just yesterday: in order for gold to become a competitor (with either fiat or Bitcoin), a favourable legal framework is necessary. This is unlikely to occur. A collapse of fiat regime might make it somewhat more likely, but I’m skeptical there too. There’s simply too much cost involved. Bitcoin is more likely to snatch the market share in such a case. Meanwhile, in the times before the collapse, Bitcoin already works while gold does not.
I’ve come to agree that gold is not better than something like bitcoin. Bitcoin is uninflateable. And inflation is the ultimate death of a currency, eventually.
That doesn’t mean its price won’t fluctuate. Price is determined by supply & demand, and the demand is what’s driven the rather large price changes recently. Although, I tend to think the price won’t stabilize until the currency is in active use as the pillar of at least one economy.
Based on my research, I agree. I don’t think the volatility is going away anytime soon. I could not find any evidence that the supply affects the price significantly (and even if it did, the supply increases are stable for 4 years), while the demand fluctuates. You can see it both in the trade volume on Mt. Gox as well as the transaction volume in the Bitcoin blockchain. Some days have easily 10 times the trading volume of other days. On big markets, this does not happen often. It’s quite possible that more bubbles will form and pop.
We’ve gone round on this one before. I will agree to treat the two terms as “synonymous” for the sake of discussion, though I object to the theoretical basis of the network effect as un-praxeological (not compatible with praxeological methods).
You’re frustrating the analysis by not isolating and simplifying the components. Of course the human economy is a rat’s nest of impossibly complex interactions but if you’re going to make any sense of it at all, then you have to find ways to simplify… un-tangling the separate functions of money is the first step.
And Austrian monetary theory is not confused about or conflating anything. Mises spelled out the relation between the other functions of money with its function as the medium of exchange:
Thus money becomes the vehicle of economic calculation. This is not a separate function of money. Money is the universally used medium of exchange, nothing else. Only because money is the common medium of exchange, because most goods and services can be sold and bought on the market against money, and only as far as this is the case, can men use money prices in reckoning.
…
The task which acting man wants to achieve by economic calculation is to establish the outcome of acting by contrasting input and output. Economic calculation is either an estimate of the expected outcome of future action or the establishment of the outcome of past action. But the latter does not serve merely historical and didactic aims. Its practical meaning is to show how much one is free to consume without impairing the future capacity to produce. It is with regard to this problem that the fundamental notions of economic calculation—capital and income, profit and loss, spending and saving, cost and yield—are developed. The practical employment of these notions and of all notions derived from them is inseparably linked with the operation of a market in which goods and services of all orders are exchanged against a universally used medium of exchange, viz., money. They would be merely academic, without any relevance for acting within a world with a different structure of action.
Human Action, Chapter 11, Secs. 3,4
It goes without saying that all these functions are intertwined and affect one another but we can use praxeological theory to derive the function of money in facilitating direct exchange and to establish its relationship (as Mises does above) with the entirely separate praxeological concept of economic calculation. Money is what makes economic calculation possible but it is its role in enabling indirect exchange that accounts for its first rise in human use.
The forum logged me out while I was writing my post, let me try again.
Allow me to analyse this a bit. Let’s for simplicity assume that your assumption is correct. What does it mean from economic point of view?
It means that for black market uses, Bitcoin decreases transaction costs. Government intereference makes the use of payment methods such as bank wire or credit cards very costly in such situations. The decrease is so high that it outweighs the network effect of fiat money. So, the economically rational choice is to use Bitcoin.
However, the decrease of transaction costs that Bitcoin provides is not specific to black markets. Practically anyone can benefit from it, just get an app for your phone, put a QR code next to your cash register or the bitcoin address on your website. Again, let’s for simplicity assume that for the average Joe, the decrease of transaction costs is too low to outweigh the network effect caused by the fiat money. But this is an empirical, rather than apriori (praxeological), claim. It does not necessarily mean it will be like this forever. If Bitcoin services mature and it use spreads (and, based on the available data, this is indeed happening), the number of people for which the transaction cost decrease outweighs the network effect of fiat money will increase too. Furthermore, hybrid solutions, i.e. use of Bitcoin only as a payment system, instead of other payment systems debit cards or wire transfers, allow Bitcoin to piggyback on the network effect of fiat and help its own spread as well.
Auxilliary developments also seem to favour Bitcoin, for example:
precedents are being set for the legal status of Bitcoin, for example the Australian regulator said that Bitcoin is unregulated, or a guy recently reported that he paid customs tax in Malta on good purchased abroad with Bitcoin
GoldMoney is shutting down their inter-user payment facilities
perceived or real increasing threat of hyperinflation / financial system collapse
This all increases the difference between the network effect of encumbent solutions and the transaction cost decrease of Bitcoin. If the trend progresses, Bitcoin can, hypothetically, evolve from a method of payment into a store of value, and then in a unit of account. But even if these two steps do not occur, as long as Bitcoin provides lower transaction costs than alternatives, it will continue to exist and provide valuable services to its users.
It is interesting you should mention this, because I object to the regression theorem as unpraxeological. Admittedly though, the network effect is an empirical, rather than praxeological, phenomenon. But that’s the point: what becomes money is also an empirical, and not a praxeological, issue.
My take on the evolution of money:
Money evolves in a situation without money if it decreases transaction costs
If there already is money, new potential money can evolve if it provides lower transaction costs
If the transaction cost decrease outweighs the network effect of the old money, the new money displaces the old money
This is a more universal progression than the regression theorem, it explains how commodity money evolves in a barter situation, it also explains how money substitutes and fiat money evolve, and it also explains how Bitcoin evolves. Not only that, it also explains that how Mises and Rothbard imagine new money will come around (new substance superiour to gold), is only likely to occur if there is no money. It neglects transaction costs, more precisely, it assumes that apart from physical exchange, the transaction costs are the same. But we know they are not the same: money substitutes have lower transaction costs than physical goods, and Bitcoin has even lower. A new physical substance cannot decrease the transaction costs further. However, something like Bitcoin, which is decentralised and does not require substitutes to facilitate different forms, can. So, if new money displaces the current system, it must be something like Bitcoin, i.e. a replacement for dominant payment systems.
And this is precisely what I am attempting to do, after researching both Bitcoin and money.
Very well then, please address my points.
While this is correct, it omits both the evolutionary issues, and conflates the different function of money. The current economic infrastructure is dominated by money substitutes. This is what Bitcoin, in this phase, is competing with: other payment systems. The fact that it uses its own unit of account is irrelevant, that just slightly increases transaction costs. Hybrid systems eliminate the necessity to use Bitcoin as a unit of account. So you now have three instead of two components for the evaluation: network effect of fiat money, transaction costs decrease caused by Bitcoin, and transaction cost increase caused by the hybrid system that converts between fiat and Bitcoin. Again, the outcome is an empirical issue.
In order for Bitcoin to successfully spread, it does not need to become money. As long as it’s a cheap method of payment, it will remain in use. Maybe it will become money, maybe it won’t. It’s desinged in a way that it can.
One thing to keep in mind: it is already possible to barter services online. A professional translator can offer translation services in exchange for professional web design, for example.
Despite that such an arrangement would allow people to cut on business costs immensely, the only reason many people don’t do this very much is that they have a hard time finding a double-coincidence of wants. A translator who wants a website professionally designed would have to find a web-designing translation-wanter. And they would both have to want exactly the right amount of translation/design done, or else there would be a mismatch.
Finding someone who wants to exchange X amount of translation for Y amount of web-design, during the exact same time frame, and who has the specific design abilities and tastes the translator is looking for, could be very difficult.
Enter bitcoin. Forget all the points raised above about whether it is money or whether the price will collapse. The fact of the matter is that all the translator has to do to save a lot on business costs is find a web designer who is willing to transact in bitcoins - even if the designer will immediately* convert those bitcoins back into cash on his end.
Once the two have made a deal, the translator can buy bitcoins and instantly send them to the designer, who can then instantly convert them back to cash.
Now it is of course possible that the price of bitcoins might collapse in those few moments it takes to convert from cash → bitcoins → cash. Bitcoin crashed half a year ago, sure. But even on the day of the crash the risk - if the transaction only took moments - would be miniscule.
*The only problem I see now is that services for converting between bitcoins and cash are still rather slow and laborious (see video below). The market is developing very quickly, though. Once it is possible to completely avoid any risk of market fluctuation in bitcoins by having near-instant processing, I think we will see bitcoin start to take off - not as a money (yet), but as a transaction tool.
Either way, it is not now money. At this point, it seems we’re going in circles.
Judging from your prior posts, I don’t think you really understand what Austrian monetary theory is. You assert, for example, that the regression theorem is “unpraxeological” by asserting “what becomes money is also an empirical, and not a praxeological, issue”. This is not true. Leprechaun hats will never be money because they do not exist and this is not an “empirical” point, it is an a priori truth. Only something that is real, which exists, can become money.
You later assert, “It [Austrian theory] neglects transaction costs, more precisely, it assumes that apart from physical exchange, the transaction costs are the same.” First of all, Austrian theory does not deal in “network effects” and “transaction costs” because it uses a methodology which is fundamentally incompatible with these “mainstream” economic ideas. And Austrian economics does not neglect anything about “transaction costs” also known simply as costs. Is transportation a “transaction cost” or a “non-transaction cost”?? That all depends on how you look at it, which makes the whole problem of what precisely constitutes a transaction cost arbitrary.
If gold was 1,000,000 times more dense than it is, presumably, it would have prohibitively high “transaction costs”. Or if gold was 1,000,000 times more abundant than it is, again, it would have prohibitively high “transaction costs” (the Spartans used gigantic pieces of iron as money for reasons I cannot fathom). To say it another way, the fact that gold is used as money is a result of its particular properties that make it more suitable as a medium of exchange than all other alternatives. In other words, its use as money is not some mystical result of the Divine will, it is simply a comparatively better good for that purpose than all other goods.
There is nothing empirical about this. Some one good must be comparatively more suitable to functioning as a medium of exchange than all other goods, as long as there is a variety of goods. We can see this principle in operation in prisons, for example, where cigarettes are frequently used as money. There’s nothing inherent about cigarettes that magically endows them with a divine principle of “prison money.” They are simply the comparatively best good for the purposes of exchange medium, relative to all the other non-contraband goods which prisoners can possess.
I find it funny you claim this since you contradict yourself here. You simultaneously claim that what becomes money is, and is not, determined by empirical data.
Furthermore, you do not address any of my points:
difference between money coming to existence from a situation where there’s no money, and a situation where one money replaces other money
transaction costs
that economy does not only consist of exchange of goods, but also from provision of services
I know how the concept of addressing points made by opponents during a debate, particularly one that is dragging on for several months, seems to be strange to some, nevertheless I consider it to be not only a sign of good manners, but a necessary component of a debate.
If Clayton is not interested in a debate, all he has to do is to shut up.
The Spartans probably used giant pieces of iron for the same reason some cultures have used gigantic stones: limited supply, they cannot be stolen, and ownership can be transferred without moving them, etc.
As for Bitcoin and gold, this is one area where Ron Paul has not kept up with the times. He keeps going on about the gold standard. There’s no viable return path to a gold standard when you’re in this much debt, and the gold standard would not accomplish reductions in inflation and currency volatility either.
Gold may not be inflateable, but gold certificates are, and unless you bar all transactions not conducted in gold, you’re always going to be using gold substitutes, meaning you have achieved nothing. You now have a fiat currency supposedly based on gold, which can be inflated all the same. And should you bar all transactions not completed with actual physical gold, you now have eliminated all digital transactions and no longer can sustain a modern economy. At all.
It was this argument that convinced me that the gold standard was not a panacea for our particular concerns and economic values. Only something like Bitcoin can serve the twin needs of limited currency supply AND digital transactions.
So, when I start my floating state, bitcoin will be our primary currency
“Gold may not be inflateable, but gold certificates are,”
However you are using “certificate”, it is not the way that I use it. I’d use it as “title” to gold, and titles can’t be inflated, by definition (if you have two “titles” to the same resource, then neither is actually a “title”).
Anyway, that’s not my point: I actually want to ask a question. You refer here to “currency” several times. Is that the exact same things as “money” in whatever counts for “mainstream” Austrian circles? If they aren’t the exact same thing, what’s the difference (bretween money and currency)?
A currency is basicly a unit of measurement, in this case of relative valuation. That’s the ‘congress shall set…units and measures’ bit. Money is, generally, a widely valued commodity with the several characteristics of a good money; but not necessarily of any particular weight or measurement of that commodity. A gold coin with it’s purity and weight established by a trusted entity, such as a national mint, is both a money and a currency at the same time. Bitcoin is a currency, but can’t rationally be considered a money from an Austrian perspective.
That’s all well and good, the difference between them, but does it make any difference in the real world? Back when I think it was Henry the 8th devalued the money of England, certain Lords predicted the people woud revolt, the currency would fail, etc., etc.
What actually happened?
People began hoarding the actual gold coins and preferring to spend the adulterated ones, creating the rule ‘bad money driveth out the good.’
What made this adulterated, cheap metal coin able to be used as currency was its controlled supply. Does Bitcoin have that? Yes.
The real reason Bitcoin hasn’t yet been used as a mainstream currency is simply its novelty and the immaturity of digital transfer mechanisms (still tough to toss a coin to a stranger on the spot as the tech to do so is not yet ubiquitous in cellphones).
While I agree that from a legal perspective, in particular Rothbard’s Title Transfer Theory of Contract, a “title” cannot be inflated, I disagree that
this is the only possible interpretation of these instruments. It ignores that the instrument can be a service instead of a title to a good.
current or hypothetical future instruments denominated in some currency will evolve into the direction of being titles.
Actually, in the older papers I read, the economists use “currency” to denote cash, and money to include cash plus all other money-substitutes.
I am myself uncertain what to use. I personally tend to use “medium of exchange”, rather than “money”, when referring to Bitcoin. Even though Bitcoin is used as a medium of exchange, and, for some, as a store of value, it is not used as a unit of account (yet).
Allow please for a bit of dissent. The controlled supply is only one factor influencing the decision. The general reason was a reduction of transaction costs. This includes scarcity, but also weight, homogeneity, recognisabiilty, usability for purposes other than money and so on. I don’t think any of those variables in particular is apriori dominant or necessary, it’s the overall cumulative effect on transaction costs that decides it.
If you look at it more carefully, it’s unlikely that anything will score full marks in any of the categories. For example, gold is not completely homogeneous. There are different degrees of purity, and from a practical point of view, 100% pure gold is probably impossible to obtain in meaningful quantities. Coins need to have a lower percentage of gold than, say, bullion, because they need to be more resistant to physical stress. Also, physical exchange is becoming less and less preferred method of payment (I read somewhere that in Europe, the dominant payment method is a debit card, not cash). With respect to transaction costs, we’re past the stage where the physical attributes of the medium of exchange can decrese them. This is not even my idea. Economists long before me have claimed that this progression is to be expected. Selgin wrote that in an advanced economy, outside money would not circulate. Fischer Black, in 1970, wrote that a cashless economy is more efficient with respect to transaction costs.
Bitcoin is groundbreaking because it merges the service that provides a decrease of transaction costs with a decentralised, predictable supply. It works automatically, does not need particular legal system to support it. I can’t remember any book or paperI read about money or payment systems, Austrian or not, which did not require legislative support in order to establish the system envisioned by the author. Even the anarchocapitalist ones, which do not assume central planning for legislation, still require that the banking sector works according to specific legal rules. Bitcoin gets rid of this problem.
