What Bitcoin is

[shurdeek]

Smiling Dave,

you just refuted your own former claims. By quoting Mises on saying that money is a common medium of exchange, it is necessary that uncommon media of exchange exist too. Media of exchange that are not money exist, and some of them are also more liquid than others. Human Action in section about secondary media of exchange elaborates on it a bit more.

You just showed that you have no idea what you’re talking about. You’re randomly mixing several things, you have not formulated the regression theorem yourself and you tend to avoid confronting other people’s arguments. And then you have the audacity to imply that your opponents do not use logic?

[Anenome]

Then there’s only one rational way to look at bitcoin, SD.

Bitcoin is money to those whom use it as a medium of exchange and not money to those whom don’t.

That avoids the question of ‘how many people need to use it before it’s money.’ Anything serving as a medium of exchange is being praxeologically used as money by that group.

Thus, bitcoin is money. Just not a money in widespread use. Yet.

[Malachi]

Stand by for dave to insult those people and post a link to his blog.

[Amanojack]

@Smiling Dave

Summing it all up, if you want to show why Mises Regression Theorem does not apply to bitcoin becasue it is a “new animal”, do the adult thing. Summarize your understanding of the theorem. This is an important step, universally used in serious discussions. If you get it right, we can then take the rest of your argument seriously. If you get it wrong, we can mock you.

If we are to proceed rigorously, it doesn’t matter whose theorem it is. Mises’s didn’t give a presentation that is clean and rigorous in the ways I want it to be, and I don’t consider it a serious objection in that form, so I will give my own theorem:

Something can only be valued for exchange purposes by a group of people if it was valued for non-exchange purposes by at least one person P before that, because if no one ever valued it for non-exchange purposes, no other person Q would accept it in exchange. The only reason Q would accept it is because they know someone else (P, at least) values it and hence might accept it in exchange for something Q wants.

The minimal case is then, for example, that Grandma Koto - a baker - is the only person who values the item for non-exchange purposes. As soon as Q knows this, he may start to accept the item for the exchange value it gives him with Grandma Koto. For example, Q may know he will want to obtain bread in subsequent weeks, and he knows Grandma Koto will give him bread in exchange for the item. To everyone who wants Grandma Koto’s bread, the item now potentially has value for exchange purposes. It also potentially has value for exchanging with anyone who wants her bread, and anyone who transacts with anyone who wants her bread, etc. (the network effect).

So the million-dollar question here is has anyone ever valued bitcoins for non-exchange purposes? Of course. I can virtually guarantee that at least one person thought it would be cool to have bitcoins, for sentimental value, hacker cred, or whatever. Done.

This is why I just don’t think the regression theorem is a serious objection. If you want to make it up to be this rigorous mathematical thing, you can’t hold to a strict interpretation of “industrial value.” If your definition is strict enough to exclude valuing bitcoins for sentimental reasons, the proof fails: it is obvious that even if only Grandma Koto persistently likes bitcoins strongly for sentimental reasons, other people may start accepting bitcoins because they love Grandma Koto’s bread, then other people may start accepting bitcoins because they want to trade with those people, etc.

Live by the rigor, die by the rigor.

And that really underscores what I find so unconvincing about the Regression Theorem objection: it is presented as a “theorem” with all the mathematics-like precision and logical rigor that should entail, but then all the terms get muddled up at the arguer’s own convenience.

It’s so easy to equivocate on “industrial value” so that it simply means any non-exchange value when we are checking that the proof is rigorous, but then gets switcheroo’d to what it actually sounds like: not any non-exchange value, but only classical production and consumption value. And if we get to that stage the same trick can be pulled by equivocating again, this time on “consumption value,” where sentimental value (for example) is counted as consumption value when talking about how the proof is rigorous, but then not counted as consumption value when talking about bitcoins.

Then there is fuzziness when talking about how many people constitute a group large enough to matter or what “commonly accepted” means, and none of that is informed by the regression theorem or any rigor it may have. Once we are having that debate, the “rigor” or “theorem” card certainly cannot be played as backup since it is just an argument about the interpretation of the premises*.* Additional fun can be had by equivocating between “medium of exchange” and “commonly accepted medium of exchange” as is convenient.

To recap, the regression theorem argument dies the moment you point to a single person who really does value bitcoins (for any reason!). Here are a whole bunch. From there, if you want to go full-rigor, you have to allow for super-network effects (and this isn’t too amazing since we have a new super-networking thing called the Internet). The moment you call it a nerd clique, you can no longer claim that statement under the umbrella of any Regression Theorem-based rigor. But even that cat is already out of the bag, because whole scadloads of people already do accept bitcoins. The moment you object that it’s just a bubble, you can no longer claim that statement under the umbrella of any Regression Theorem-based rigor either.

[Esuric]

It’s shocking how many people still don’t understand what money is and what money is not.

[Smiling_Dave]

It’s shocking how many people still don’t understand what money is and what money is not.

Esuric, we may have diagreed on things, but I ceratinly agree with that one.

Replies to evryone on the way, fear not, guys.

[Malachi]

Replies to evryone on the way, fear not, guys.

Dave, your eagerness to participate in the discussion is never in doubt. Your willingness to contribute to the discussion, is however quite dubious. I would rather have a bitcoin, fleeting as they may be.

[Smiling_Dave]

AJ,

1. To wipe away with one swoop all your objections about vagueness and equivocation as far as values of an object, read on.

The uses of an object can be split into two mutually exclusive, but together all encompassing, categories, A and B. A is the use one gets from passing it on to the next guy, aka use as a medium of exchange. B is every other use, whether sentimental value, industrial use, anything that will make a person want to hang onto the object and not pass it on. That’s why I prefer using the phrase “intrinsic value” for B instead of all the other slightly misleading ones like industrial value.

Mises proves, step by step, that an object cannot ever have use A alone. Use A will only latch onto an object that already has use B. A careful reading of his proof will make clear that he never confuses A with B, as you erroneously claim.

2. Your next argument is that if one lone isolated person in the whole universe values something for any reason whatsoever, then it can become money. If Charlie the Retard values some generic useless rag because it comforts his troubled mind, even though we are talking about rags that mean nothing at all to anyone else in the world and they would never pay a single penny for any quantity of them, then useless rags may someday become money. The regression theorem does not contradict this, you claim, because use B by a single individual is enough for use A to attach to it.

Again, that’s true. [Note: I’m being sarcastic]. Millions of people around the world may now hang on to those rags because they can use them to trade with Charlie the Retard, since he needs those rags. Actually all he needs is one, and he may already have one, but still, all rags have now gone up in exchange value by an amount that is non-negative, but extremely close to zero.

Same thing with bitcoins. If one person feels cool because he has a bitcoin, then the value of every single bitcoin to every single person on the planet has now gone up, because maybe one of the millions will someday get a chance to trade that bitcoin with Charlie the Nerd. He already has one, maybe he might want two. Such a possibility certainly makes every bitcoin worth $33, or at least $5, right? Wrong.

You see where I’m going with this. We are talking about the possibility of bitcoin becoming money, meaning universally accepted, commonly accepted, generally accepted as a medium of exchange. Mises proves that this can only happen when almost all people will think "Oh boy! A bitcoin! I can sure use one of those to trade with. So many people want bitcoin not to pass on to the next guy, but to hold onto and keep for themselves forever, just like Charlie the Nerd, that I will have no problem at all disposing of it. " For this to happen, bitcoin will have to be in great demand for its intrinsic value. But bitcoin has no intrinsic value to everyone except Charlie the Nerd. The world will never become a vast army of Charlie the Nerds; thus bitcoin will never become money.

Let me explain where your error lies. Say you open a math book and read a theorem that says every even number is the sum of two primes. You scoff at the book and say “I have some slabs of prime beef here and no even number is the sum of prime slabs of beef. Numbers are intangible objects”. I hope the mistake is obvious here. Before you can grasp what the theorem is saying about primes, you have to know what the book means when it uses the word prime.

Similarly, you have to grasp what the Regression theorem is talking about before you can understand it, or presume to agree or disagree with it. It is talking about money. Furthermore, it is talking not about your personal definition of money [an amusing and absurd ruse used by some to get around the regression theorem, redefining money as they see fit], but about the defintion of money as used by economists the world over [not just Austrians].

Money is a universally accepted medium of exchange. That’s what Mises is talking about. And he is asking how did it ever get that way? How did it ever get so much use A that it started getting a significant value because of the use A that it has? [After all, value comes from demand. To get even a small non zero value to everyone in an economy, you need great demand for the object in that economy. We are talking about something that is Universally Accepted, remember? The definitions, keep your eye on the definitions]. And his answer is that it can only get a significant value as A because it had plenty of use B first by many many people. If you told him that it got use A value to almost everyone in an economy because only one Charlie the Nerd wanted one bitcoin, he would, being more polite than me, not express his scorn openly.

[shurdeek]

Another grave error by Smiling Dave:

@Smiling Dave

Mises proves, step by step, that an object cannot ever have use A alone.

Wrong. This is what he writes in Theory of Money and Credit:

@Mises

In the case of money, subjective use-value and subjective exchange value coincide. Both are derived from objective exchange value, for money has no utility other than that arising from the possibility of obtaining other economic goods in exchange for it.

Also, Rothbard affirms that once liquidity is sufficient (i.e. critical mass of the network effect is reached), the function of a medium of exchange is self-sustaining:

@Rothbard

On the other hand, it does not follow from this analysis that if an extant money were to lose its direct uses, it could no longer be used as money. Thus, if gold, after being established as money, were suddenly to lose its value in ornaments or industrial uses, it would not necessarily lose its character as a money. Once a medium of exchange has been established as a money, money prices continue to be set. If on day X gold loses its direct uses, there will still be previously existing money prices that had been established on day X – 1, and these prices form the basis for the marginal utility of gold on day X. Similarly, the money prices thereby determined on day X form the basis for the marginal utility of money on day X + 1. From X on, gold could be demanded for its exchange value alone, and not at all for its direct use. Therefore, while it is absolutely necessary that a money originate as a commodity with direct uses, it is not absolutely necessary that the direct uses continue after the money has been established.

Rothbard affirms that the point of the regression theorem is to explain how the market price and liquidity are established. He made a couple of other problematic remarks (e.g. he thinks that for this critical mass, it is necessary that the medium of exchange is money first, and that this cannot happen without other uses), but he clearly refutes Smiling Dave’s nonsense.

[Aristippus]

But with that use of the phrase, then of course bitcoin being a medium of exchange proves nothing whatsoever about its chances of becoming money.

Yes, but by the same token there is nothing a priori which says that it cannot become money, since we have already said that it is a medium of exchange. Do you agree?

If it is not even of common use, it has no chance of ever being money.

Again, you are using words incorrectly (or by your own definition, in which case you should demonstrate how that is different to that of the Austrians). Look at the Rothbard quote I already posted (or indeed the Mises quote that you just posted!):

“A commodity that comes into general use as a medium of exchange
is defined as being a money.”

Two sentences later he uses ‘general use’ and ‘common use’ as synonyms. It’s therefore ridiculous for you to say what you have, since for it to be in common use is indeed for it to be money!! It is also ludicrous on the face of it, because it would mean that nothing could become money, since for a medium of exchange to become money it would have to, according to you, begin life in common use!!

[Smiling_Dave]

Pete,

Yes, I was imprecise. The correct statement is “Mises proves, step by step, that an object cannot ever begin with use A alone”.

Which is all that’s needed to doom bitcoin.

[shurdeek]

No Smiling Dave,

you can’t wiggle out of your contradictions anymore.

[Smiling_Dave]

Yes, but by the same token there is nothing a priori which says that it cannot become money, since we have already said that it is a medium of exchange. Do you agree?

Yes. The proof that it cannot ever become money stems from it not having intrinsic value.

Is anyone even bothering to read and/or understand the theorem?

Again, you are using words incorrectly…

The underlying idea is very simple. It is a question of degree, as Rothbard makes clear in the paragraphs preceding the one you quoted.

The way it works is this. At some point, some object becomes very popular, meaning in great demand, for its intrinsic uses. The next stage is that people start using it in many instances as a medium of exchange. This happens more and more often until, at some point that is not clearly defined, it is so widely used that it is called money.

[Truth_and_Liberty]

@Smiling Dave

Trust me, I’ve been through these arguments many many times.

I don’t need to trust you on that point. I know you have. But a humble man is always open to the possibility that he may have been mistaken before.

I sense, however, that you have no dog in this race and want to know what’s what.

Yes, I seek the truth. Are you here for some other reason? If you are only here to defend your dog (whatever that is), then there doesn’t seem much point continuing the discussion. What is this ‘race’ by the way, and what is your ‘dog’?

I’ve summarized all I have to say on bitcoin in this article on my humble blog: http://smilingdavesblog.wordpress.com/2012/08/03/bitcoin-all-in-one-place/ The comments on the articles are also informative for the most part.

I have read your blog posts. You may want to revise some of them in light of what you’ve learned in this thread.

Technically, I stand corrected. Indeed, the way Rothbard uses the term, if even one transaction is made where A wants butter, say, not to eat it, but to trade further with it, then butter is a medium of exchange in that one transaction.

But with that use of the phrase, then of course bitcoin being a medium of exchange proves nothing whatsoever about its chances of becoming money.

That is correct.

In light of your recognition that being a medium of exchange does not require being commonly accepted, your latest response to me doesn’t make any sense, since in that response you were using a different definition of medium of exchange. But now that’s cleared up, I would like hear which part of the transition A → B → C → D you think the regression theorem is about. In other words, which part of the transition does the regression theorem, in your understanding, rule out for non-commodities?

[Aristippus]

The proof that it cannot ever become money stems from it not having intrinsic value.

What do you mean by ‘intrinsic value’? The marketability of the medium of exchange? Show me where either Mises or Rothbard say that a money must have ‘intrinsic value’.

The word ‘intrinsic’ is used twice in Human Action:

P. 96: “Value is not intrinsic, it is not in things.”

P. 203: “An inveterate fallacy asserted that things and services exchanged are of
equal value. Value was considered as objective, as an intrinsic quality
inherent in things and not merely as the expression of various people’s
eagerness to acquire them.”

It is used exactly once in the entirety of Man, Economy, and State with Power and Market:

P. 44: “Where labor does
provide intrinsic satisfactions, the utility of the product yielded
will include the utility provided by the effort itself.”

Is anyone even bothering to read and/or understand the theorem?

We all have, and do. It is you who is confused.

It is a question of degree, as Rothbard makes clear in the paragraphs preceding the one you quoted.

Show me exactly where he does this. He talks about a good becoming more and more popular but he does not state that it can’t begin life - in terms of being a medium of exchange - in one series of transactions. He uses ‘common’ and ‘general’ as synonomous and in referring to money - as does Mises. You have done nothing to clear up the claim that “If it is not even of common use, it has no chance of ever being money.” Do you stand by this claim or retract it? Gold was not in common use anywhere in 5000 BCE. Could it therefore not ever become money??

The way it works is this. At some point, some object becomes very popular, meaning in great demand, for its intrinsic uses. The next stage is that people start using it in many instances as a medium of exchange.

You have already granted that bitcoin is a medium of exchange, which means you do not need the first stage in order for this particular example of a medium of exchange to come about. Agree? Or is bitcoin in fact not a medium of exchange? Or can media of exchange come about without having ‘intrinsic value’? If the latter is the case, how can a medium of exchange come about without intrinsic value, but at the same time that medium of exchange cannot become money?

[Smiling_Dave]

Pete,

Give it up. Really. There are no contradictions. You, on the other hand, have yet to do what AJ attempted, however feebly and incorrectly, mainly to summarize the theorem and summarize the proof, and then show exactly which line of the proof is wrong.

Oh, did I mention that when you summarize the theory and the proof it has to be to your opponent’s satisfaction? You can’t go about making up your own version of the theorem or the proof and tackle that. For some reason AJ forgot about that.

And I’m not making unreasonable demands here. It’s standard operating procedure for serious discussion among people who seek the truth [as opposed to htose with an agenda].

[shurdeek]

Smiling Dave,

I formulated the regression theorem to you, twice, and showed how Bitcoin adheres to it. You have not formulated the regression theorem, you have not show which part of my argument is wrong. You lose.

[Smiling_Dave]

Graham,

I didn’t mean that I had a dog in the race [=an agenda, some hidden reason to stubbornly cling to a position regardless of truth or falsity]. I was hinting that many I have had the pleasure of encountering on bitcoin threads, do. How else to explain some of the curious posts they have made?

I might need to make some minor revision, to make sure that “medium of exchange” is replaced with “money”. The thing is, the previous rounds of debate had the bitcoiners insisting that it was already a medium of exchange, and thus it refutes Mises by its very existence. Since, obviously Tony the Simple exchanging tissue paper one time with Charlie the Mentally Challenged proves nothing, I assumed they meant it was a thriving medium of exchange, one that was oh so close to actually being defined as money, with nothing standing in tis path.

The Regression Theorem talks about Money. It begins with asking how does something get any value as money, and he concludes that it can only happen if it starts off as a small time medium of exchange and grows from there, which, but for cases such as Tony the Simple, will require it to have intrinsic value to a great many people, which bitcoin clearly lacks. [More on intrinsic value next post]. So the direct answer to your q is that the regression theorem is talking about step A itself.

[Smiling_Dave]

Aristipuss.

This post will be about intrinsic value. The next one will clear up all misunderstanding about common use etc.

I elaborate upon the dual meaning of intrinsic value and its relevance to bitcoin [look away Malachi] right here: http://smilingdavesblog.wordpress.com/2012/07/08/bitcoin-and-intrinsic-value/

I quote chapter and verse of Mises using the phrase intrinsic value [with plenty of triumphant crowing on my part] right here: http://smilingdavesblog.wordpress.com/2011/12/21/was-mises-regression-theorem-a-mere-history-lesson/

To make Malachi happy, I will quote the relevant part of the latter article:

That’s what some silly folks are saying over at the mises.org forums. That the theorem only says what happened, not what must always happen. [Look at my article, Bitcoin Takes a Beating, for info about what the theorem says, complete with chapter and verse and Smiling Dave’s exposition].

Let me enlighten them.

First, let’s appeal to authority, shall we. Here are a few respected Austrians talking about the Theorem, and what it claims. All emphases mine:

Rothbard: On the other hand, while money had to originate as a directly useful commodity, for example, gold, there is no reason, in the light of the regression theorem, why such direct uses must continue afterward for the commodity to be used as money. Once established as a money, gold or gold substitutes can lose or be deprived of their direct use function and still continue as money; for the historical reference to a previous day’s purchasing power will already have been established.*53
Note he says HAD to originate, not historically did by accident.

Professor Shostak: The theorem shows that money must emerge as a commodity.

Tim Terrell: One of the consequences of the regression theorem is that money must arise from a commodity already in general use. If there is no nonmonetary use for the good, it will not develop the widespread demand that must precede its use as a medium of exchange. As Mises’s student Murray Rothbard wrote, money “cannot be created out of thin air by any sudden ‘social compact’ or edict of government.”[2] But once a good develops a monetary nature, it is there to stay. The nonmonetary uses are no longer necessary to maintain the good’s monetary value, because there is already a set of prices based on that good.

[Note to the bitcoin folks: Yes, money must first be “in general use” with “widespread demand”. which bitcoin lacks. One Pete Sudra is on record as saying that a couple of guys at a small convention using bitcoins for a couple of days is enough to prove bitcoin is money. General use and widespread demand is more than you and your drinking buddies.]

And now, the coup de grace, Mises himself in Money and Credit:

The Necessity for a Value Independent of the Monetary Function
before an Object can serve as Money

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] and a confirmation of Menger’s hypothesis concerning the origin of the use of money.

This link with a pre-existing exchange-value is necessary not only
for commodity money, but equally for credit money and fiat money.’
No fiat money could ever come into existence if it did not satisfy this
condition...

There you go. He mentions bitcoins explicitly. Of course, you guys know it’s a gag. Bitcoins didn’t exist in Mises lifetime. I inserted the piece in brackets tio show exactly where bitcoins fit into the scheme of things.

And guess what? Mises laid out the logic of the theorem here like it was an Aristotelean syllogysm. Impeccable logic. Apodictically certain.

One last minor note. Whenever I use the phrase “intrinsic value” over at the forums, some newbie will say sanctimoniously that nothing has intrinsic value, it’s all subjective as Mises taught me, bla bla. This has happened many times. Well Mises right here [where I underlined it for your benefit] used the phrase intrinsic value. Put that in your pipe and smoke it.

[The mentally challenged will be quick to point out that Mises did not say “intrinsic value”, but “intrinsically valueless”. Those with even a nodding acquaintance with elementary logic will understand how foolish such an objection is].

BTW, I see from the Tim Terrell quote that he, too, uses "medium of exchange"as I do/did, to mean more than just Tony the Simple using it once. So Graham, no need to change anything.

[Smiling_Dave]

I formulated the regression theorem to you, twice…

Must have missed it. Will you kindly provide the links to your two efforts?

You have not formulated the regression theorem.

I sure did, in my article [with apologies to Malachi] Bitcoin Takes a Beating

you have not show which part of my argument is wrong…

You have tried various arguments over the long discussions on this forum. I have tackled them all right here: http://smilingdavesblog.wordpress.com/2012/08/03/bitcoin-all-in-one-place/