Home » Uncategorized » The Regression Theorem in Regress.

# The Regression Theorem in Regress.

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Barter Economies.

The confusion about the regression theorem multiplies. Once again, that hoary chestnut, that the reg. thm. only applies to a barter economy, is getting popular.

Time for Smiling Dave to clear things up. We begin by quoting Mises, then, since it is written in very stilted English, to translate it.

In Human Action, Mises begins his study of the regression theorem by noting that “…the extent of that part of the demand for a medium of exchange which is displayed on account of its service as a medium of exchange depends on its value in exchange.”

Let’s translate this into simple language to make sure we know what it’s saying.

“…the extent of that part of the demand for a medium of exchange which is displayed on account of its service as a medium of exchange…”
Translation: Why does Smith want and accept a dollar, or a bitcoin, or any other unit of any kind of money, as worth a pound of apples?”

“…depends on its value in exchange.”
Translation: Because plenty of other people also want the dollar or the bitcoin in their pockets, and also accept it as worth a pound of apples.

He writes that this simple statement led people to reject the whole Austrian analysis of money.

Devil’s Advocate: And how right they were. Supposedly Smith only accepts it as money because Jones and Butler and Yeats, and thousands of other people do. But the same is true of Jones. He only accepts it because a thousand other people do. Same with every single one of those thousands. Each one accepts it only because everyone else does.

And of course, that can’t be. You have to start somewhere. When the world was created, nobody accepted anything as money, obviously. So let’s say that on January first, nobody accepts a silver coin as money. Why does Smith wake up on January second and agree to accept a silver coin as money from now on, when nobody else does? For him to accept it, you need thousand of other people to accept it. Otherwise he won’t be able to buy the many things he needs with silver coins. [Alternately, why do thousands of people wake up on January second and all decide to accept the silver coin as money?]

SD: Yes, that’s an excellent question. And that question has to be answered whether Smith is living in a barter economy or a money economy [meaning where people are using gold, say, and he suddenly accepts silver as money, too]. Why should he accept silver coins, or bitcoins, or any new candidate for money, that nobody else does?

Bottom line, the regression theorem’s question has to be answered in every economy, barter or money. How wrong it is to say that the reg. thm. only applies to a barter economy.

Praxeology and Psychology.

Some have argued that that there is no need at all to answer the above question. That we are barking up the wrong tree. Here is the gist of their argument:

We have left the field of praxeology [=economics] and have entered into psychology when we talk about why Smith will accept bitcoins, or anything else, as money. That is a question for psychology, not economics. People are funny. They do things for subjective [= often stupid] reasons, often egged on by wild, irrational, psychological impulses. It is not our task to delve into their minds, but to study their actions.

Thus, these people claim that asking why people accept or reject a bitcoin as money is not our job. Leave it to the shrinks. We are economists, and have a different job to do, namely, serious economics. Just for fun, let’s call the assumption that we need not understand why people choose the means they do the Shrink Hypothesis.

DA: You make it sound like they are wrong.

SD: Indeed they are. That whole argument confuses means and ends. The ends a man chooses are subjective, yes. Why he chooses them is not part of economics, that’s correct. But the study of the means he chooses to achieve his goals is the very heart of economics, and is not something to be left to the shrinks. As Mises writes in Human Action, “It [=praxeology] is a science of the means to be applied for the attainment of ends chosen…”

DA: So the shrinks study why people choose certain goals, and economists study why, given a goal, they choose certain means to achieve that goal.

SD: Yep.

DA: But Dave, maybe the Shrink Hypothesis is right. Maybe economics studies the means people use, but does not study why they use them.

SD: That cannot be so. To prove this, lets look at the laws of supply and demand. Every economist agrees that the higher the price of  a product, the more people will be willing to supply the product, and the less they will be willing to buy the product.

Now for a thought experiment. Let’s assume that one day all mankind decides they want to buy high and sell low, always. The higher the price of anything, the more people start buying it. And this happens for everything, universally contradicting the laws of supply and demand. And that happens from today until the end of time, for all goods and services. When asked, they will all say that their goals remain the same as they ever were.  Since this is a thought experiment, let’s add that we know they are telling the truth.

DA: But that implies they have all decided that wasting money is a means to get rich. They have sized upon a new means.

SD: Would such a reality contradict all we know about the laws of supply and demand?

DA: Yes it would. It is exactly the opposite of what all the textbooks say.

SD: Would it behoove us as economists to try and figure out why they seized on this new means of doing things?

DA: It absolutely would. If we want to get to the bottom of things, and understand why reality contradicts our laws of economics, we certainly do.

SD: Not if you agree with the Shrink Hypothesis. Then you have to say that who cares why people have suddenly chosen a mad means of doing things. Economics has been proven wrong by the new reality, and that’s that.

DA: What would you say, Dave?

SD: I’d say that what is really going on is that the thought experiment has a missing piece. If the experiment wants to say people have chosen a new means, then it has to say why they have chosen that means. Because economics always has to know why a particular means was chosen. That’s what economics is, knowing all you can about the means.

DA: But the proposer of the thought experiment would be hard put to answer why everyone suddenly decided losing money is the best way to make money.

SD: Exactly. Thus, we have refuted the thought experiment, but the Shrink Hypothesis has to accept it. And it has no way of claiming our thought experiment is implausible. Remember, the Shrink Hypothesis considers all possible choices of means as equally valid, and thus equally likely, at least in theory. They see nothing odd about all mankind getting up one day and accepting bitcoin, or anything else, as money. Remember, people are funny.

DA: But wait a minute. Your argument assumes that bitcoin is a means. Is money a means or an end?

SD: Marx wrote that to a small group of people money is an end in itself. But surely even he was only talking about money that can be used to buy things. Even Marx would never claim that some capitalist runs his business solely for the purpose of accumulating Monopoly money. Come to think of it, he writes that they pursue “exchange value”, proving my point.

So that to almost everyone alive, money is a means of achieving their ends. You work to make money so you can buy stuff. You don’t work to make money because it looks pretty. You might buy a painting because it is pretty, because having a pretty painting is a goal you might have. But nobody has a goal of having pretty money. Money to people is a means. That’s why it’s called a “medium” of exchange. “Medium” means “means”. Money is a means, not an end. This cannot be emphasized enough.

Thus, Mises’s classic, The Theory of Money and Credit, is not a psychology book. It doesn’t say people are funny. It discusses which money people will choose as the preferred means of buying things they want, and which money will be outright rejected as a means of getting what they want.

DA: So an economist should indeed study if and why people will accept or reject bitcoins.

SD: Absolutement.

One Guy Does Not Solve the Problem.

DA: Moving on, some people are saying, yet again, that to be a medium of exchange all you need is one person using the bitcoin once to buy a pizza, and then the bitcoin is forever enshrined as a medium of exchange, from that moment to all eternity. Thus, all your arguments on this blog that bitcoin isn’t a medium of exchange are refuted by simple reality. A single slice of pizza, digested long ago, shows how wrong it is to claim bitcoin is not a medium of exchange.

SD: The fact that one guy bought a slice of pizza for ten thousand bitcoins five years ago doesn’t answer the question raised by the regression theorem. Say Mr Geek accepted those 10,000 bitcoins and gave a slice of pizza for them. Smith will still not say, nor will anyone else, “OK, you want to pay me  in bitcoins instead of dollars? Sure.”

DA: Why not?

SD: Because once Smith accepts those bitcoins, he has to pay his rent and his phone bill and electric bill somehow. And he has to go shopping for food and clothing. And pay all kinds of people for all kinds of things, none of whom will take his bitcoins in payment. And he knows this. That slice of pizza did not change reality. Everyone he knows, except maybe for Mr Geek, wants to be paid in dollars, not bitcoin. And everyone they know wants the same thing.

Nor does Microsoft.

DA: But Dave, look at all the big box companies like Microsoft that accept payment in bitcoin nowadays. They consider it money.

SD: Oh no, they don’t. They won’t touch bitcoin with a ten foot pole. It never enters their wallets for a second. What happens is, there is a middle man, a bitcoin company, that accepts the bitcoins from the buyer, charges Microsoft a fee, and gives Microsoft cash dollars.

DA: And that middle man? What does he do with the money?

SD: He holds onto it, gambling that it will go up in price. Or else he sells it to other gamblers.

What is the Answer to Those Questions? How does a new Money Take Flight?

It’s in Human Action, or read Bitcoin Takes a Beating  for a popular exposition.

1. guest says:

“That slice of pizza did not change reality. Everyone he knows, except maybe for Mr Geek, wants to be paid in dollars, not bitcoin.”

Careful, here. Paper is also not money for the same reason bitcoin isn’t, in spite of some people’s willingness to use it as a medium of exchange.

Gold was money because someone, Person A, in the economy wanted it for its use-value enough that he was willing to offer a steady supply of something else in trade to someone, Person B, that Person B valued enough that it became cost efficient to save gold to buy from Person A.

Then that’s why Person C can use gold as money as a supplier for Person B, and so on.

Gold’s use-value is what maintains its value as a medium of exchange.

What’s happening with both FRNs and bitcoins is that, while people are willing to use them as mediums of exchange, since neither has a use-value, prices in terms of them cannot communicate proper subjective values for the goods they buy.

(That’s the cause of the business cycle – prices misrepresenting consumer preferences, which are what makes higher-order stages of production profitable. In an artificial boom, consumer preferences are other than what prices suggest, leading producers and investors to make malinvestments.)

The only reason they trade, now, is that goods are effectively being stolen from later users to maintain prices favorable to early users.

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2. Smiling Dave says:

I’m going with Mises’s analysis, which differs from yours in some respects. See Money and Credit.

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3. guest says:

I submit that he’s actually saying what I’m saying.

Notice the distinction being made between “its service as a medium of exchange” and “its value in exchange”.

“Value in exchange” is it’s use-value.

In other words, money’s value as a medium of exchange derives from its use-value.

Implied is the idea that “money” that doesn’t have a use-value isn’t really money.

And to say otherwise would be to say that a Regression Theorem is unnecessary, since you don’t need an explanation for prices which are pulled out of a hat, as it were.

I find it disconcerting that more Austrians don’t see this.

As soon as Tom Woods made the argument about the impossibility of trying to use “useless stones” from scratch, i recognized that my position on money, as argued here, logically followed from it.

I don’t think even Tom Woods gets this particular implication from his own video (Smashing Myths and Restoring Sound Money), from what I could gather from an episode of the Tom Woods Show where he said to the guest something to the effect of “I’m learning a new perspective on this. I hadn’t thought about it that way, before.” (really rough paraphrase)

Not even Frank Shostak gets it, based on what he wrote in one of his anti-bitcoin articles.

I’ll have to go back and see if I can find that episode of the Tom Woods Show for you. They weren’t talking about bitcoins, but it totally applied.

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4. Smiling Dave says:

I’m not sure what use-value is. I think you are defining use-value of an object X as the value a person perceives in the object because he can use it in his home, as opposed to the value it has to him because he can trade it for something else.
If so, that is not value in exchange. Value in exchange is what he can trade it for, or buy with it.
And the service as a medium of exchange, meaning the value a person gives to money because he can buy things with it, depends on its value in exchange, meaning depends on what he can buy.

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5. guest says:

“If so, that is not value in exchange. Value in exchange is what he can trade it for, or buy with it.

“And the service as a medium of exchange, meaning the value a person gives to money because he can buy things with it, depends on its value in exchange, meaning depends on what he can buy.”

Ah, but that would be redundant.

Service as a medium of exchange *means* it’s ability to buy something with it.

The distinction only makes sense if he’s talking about objects that can be used “in his home” as it were (money that’s also a commodity).

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6. Smiling Dave says:

Hard to continue in this venue, I suggest you reread the relevant part in HA and will see why its not redundant

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7. guest says:

As far as Mises’ own position, it looks like you’re right. But my response would be that his Regression Theorem is correct, but he failed to be consistently logical on the issue of money’s value as a medium of exchange.

Here’s the relevant part on which I base my claim:

“But, the critics continue, this means explaining that part of money’s purchasing power which is due to its service as a medium of exchange by its employment for industrial purposes. The very problem, the explanation of the specific monetary component of its exchange value, remains unsolved. Here too the critics are mistaken. That component of money’s value which is an outcome of the services it renders as a medium of exchange is entirely explained by reference to these specific monetary services and the demand they create.”

Notice that he speaks of demand being created. The Action Axiom does not permit such a thing, since all value is derived from individual preferences.

The way he words it, money is creating value. That’s the same basic fallacy as the Labor Theory of Value.

Individuals already have to prefer something on their value scales, or have to prefer it in the future when a more satisfactory state of affairs is made known to them (not the same thing as *creating* value), in order for them to employ means to acquire it.

If the mere service as a “medium of exchange” created value, then you could just print your way to prosperity.

And if the use-value of money disappears or, in the case of bitcoins, never existed, then its “value in exchange” is just waiting to fall to zero, absent coersion. (You were right about how Mises used this term, but then that just means he is failing to follow the Action Axiom to its logical conclusion.)

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8. Smiling Dave says:

What he talks about demand being created he is talking about individual preferences. What he means is that at first Jones likes gold and will give an apple for it because he can use the gold for jewelry. The next stage, when Jones notices everyone likes gold, is that he is willing to give an apple for it because he can then use the gold to buy an egg. The final stage, and this is the one Mises is talking about in the paragraph you quoted, is that gold becomes so convenient to use when trading for things, and thus so much more popular, that Jones is willing to give two apples for the same amount of gold, because he knows that amount of gold is in such demand by everyone that he can trade it for an egg and a pear.

He is not saying money per se is creating value. What he is saying is that the money itself has increased in value because people want it more. This can happen to anything. If there is a sudden craze for apples, say, the apples increase in value. It’s the law of supply and demand, which is of course ultimately a result of subjective values. So that what he is saying is not related to Labor Theory of value. Nor does it imply we can print our way to prosperity.

I do agree with your last paragraph. I wrote the same thing in article here called The Kickstart Fallacy, with examples that Mises mentions in Money and Credit

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9. guest says:

“He is not saying money per se is creating value. What he is saying is that the money itself has increased in value because people want it more. This can happen to anything. If there is a sudden craze for apples, say, the apples increase in value. It’s the law of supply and demand, which is of course ultimately a result of subjective values.”

True, as far as it goes; But the reason people want it more is because someone has valued it’s use as a commodity such that he is willing to regularly provide those with whom he trades a level of consistency in value such that it is more convenient to hold the commodity for trade at a later date.

It’s money’s use-value which allows this. To say that at some point the fact that others use a medium of exchange makes it more valuable to others such that it has a value that can be divorced from it’s use-value is to say that merely the act of trading indirectly is what gives money it’s trade value.

But you don’t need a regression theorem, or a history of prices, to just arbitrarily stick something in between your transactions. Just do it, if you believe hard enough that that’s the way money works.

That’s why the Ponzi Scheme analogy is so appropriate for describing bitcoins (and FRNs, I would add), in spite of its adherents’ attempt to treat it as an insignificant point: In both cases, people are voluntarily making trades based on something that has no value.

Our position isn’t that you can’t trick people into economic activity with bitcoins or Ponzi Schemes, but that those activities are malinvestments. Someone’s getting robbed in the process.

So, it shouldn’t be considered enough that people are voluntarily using intermediary goods, for it to be considered money.

What’s missing is the link to use-value.

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10. Smiling Dave says:

Reply to second paragraph: The thing is, Smith and Jones don’t care about the history of why gold is now so expensive. All they care about is that in the immediate past, like yesterday, it bought them two apples, not one. Therefore they think it will do it again today, and therefore they accept it as worth two apples. And so, the second second of your paragraph is not a paradoxical statement. Indeed it has trade value [today] because of the acts of trading indirectly [yesterday]. Mises spells all this out in HA in the section on the reg. thm.

Reply to third par: Believing hard enough is not enough, as we both agree. You need a reg. thm. to explain why there is more than “believing hard enough” going on in the case of gold.

Reply to penultimate par: The reg. thm. explains why it is enough, as above. Bitcoin is not being used widely enough [over 99% of humanity will not agree to be paid their salary in bitcoins], and 99% of those who even owm one have never bought anything with it.

Reply to last par: Careful study of reg. thm. in HA shows that link to use value is vital, but it can exist in the distant past and that’s enough to satisfy the reg. thm. However, my humble article Kickstart Fallacy explains why there are other problems. Namely, offered a choice, people will always prefer the commodity money to the fiat. As you hinted at in your earlier comments, there is no choice when it comes to FRN, because all other alternatives are illegal.

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11. guest says:

“The thing is, Smith and Jones don’t care about the history of why gold is now so expensive. All they care about is that in the immediate past, like yesterday, it bought them two apples, not one.”

But you can fake such a price by arbitrarily assigning the value of a pizza to some amount of bitcoins or handfuls of dirt, and voila!, a price that will eventually be called “yesterday’s price”.

So, since you *can* get a “yesterday’s price” without a “money” having first been used as a commodity, either you *can* print your way to prosperity because somehow inserting a superfluous step in your otherwise barter transactions creates value, or having a “yesterday’s price” is not sufficient.

Yes, people would be willing to trade such a “money” so long as they thought that it held value in terms of the means used to satisfy preferences, but why should someone think that a non-commodity money *will* hold such value? It has no basis in real means satisfaction unless some other sucker thinks it does, too?

Someone has to be robbed or defrauded for such a “money” to “work”.

It may help to say that without a theory that links the function of money as a medium of exchange to its use-value, there cannot exist a theory of malinvestment, as if the price is somehow “wrong”.

“Wrong” prices implies that there’s a specific price that’s right.

We would both agree that this price is not inherent to the good, itself, but is, rather, derived from subjective preferences.

I submit that the concept of “malinvestment” in the Subjective Value paradigm can only make sense if the “right” price is that which conforms to subjective preferences.

And since subjective preferences are satisfied through the use of real objects as means (even if the object is a person communicating to you), a money cannot serve the purpose of economic calculation without a link to the real means by which people satisfy preferences.

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12. Smiling Dave says:

By “yesterday’s price” I mean what you were able to buy yesterday with your money, and that you assume the same will be true today. So how can one fake such a price? Just because one person yesterday bought a pizza for a bitcoin does not tell me I can buy a pizza for a bitcoin today. First, because I see bitcoin is volatile. Second because only one person sold a pizza for a bitcoin yesterday. But who says he will do it today? Maybe he has enough bitcoins today and won’t sell pizza for bitcoins anymore. Finally, what about all the dozens of other things I want to buy? There is no one selling oranges for bitcoin, of gasoline, etc etc.

I don’t understand your third paragraph. How, by printing new money, can you create prosperity? How do you create value doing that? Value to what? How is the total amount of goods and services available to people increased by printing money?

As for fourth paragraph, why does money need a “basis” in means satisfaction? Because it gives a lower bound on how low the money can sink in value? Why is that important?

I don’t understand why anyone is defrauded or robbed.

I agree there is no “wrong” price.

I understand malinvestment to mean investing money in increasing the means of production of some good, for example opening a new pizza shop. It is a good investment if indeed people want more pizza. It is a bad investment, a malinvestment, if they do not, but prefer hamburgers. It is called a malinvestment because the owner of the new pizza shop will lose a lot of money.

I don’t understand your last paragraph. If a money is in wide demand and everyone is willing to accept it over all others, then it satisfies a subjective preference of being able to easily buy what I want with it. No reason to be linked to a real commodity. The reg. thm. says it has to be linked to a real comm. Because otherwise, when the money starts out, it will never be used widely, because people have no idea what it can buy.

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13. guest says:

“Just because one person yesterday bought a pizza for a bitcoin does not tell me I can buy a pizza for a bitcoin today.”

Right. That’s my point. You especially shouldn’t think it will if there’s no link to use-value.

“I don’t understand your third paragraph. How, by printing new money, can you create prosperity? How do you create value doing that? Value to what? How is the total amount of goods and services available to people increased by printing money?”

You can’t. That’s my point. But your position, as stated – even though I know you don’t believe so – followed to its logical conclusion, requires you to believe that it can.

“As for fourth paragraph, why does money need a “basis” in means satisfaction? Because it gives a lower bound on how low the money can sink in value? Why is that important?”

No, not for that reason, but because all value is introduced into the economy through the subjective preferences of consumers – that’s one of the implications of the Action Axiom. It’s why the Labor Theory of Value is Wrong and why Menger’s Theory of Imputation is right.

(Value is *imputed* to production processes (no use producing something that people don’t want), rather than created by producers or laborers (the mistaken idea that laborers “add value” – rather, they *lower costs* for the producer).)

Therefore *all* values – the exchange value of money, included – must logically derive from subjective consumer preferences. There cannot logically be a separate source of value that permits money’s value to ignore consumer preferences for the actual means (goods) used for wants satisfaction.

“It is called a malinvestment because the owner of the new pizza shop will lose a lot of money.”

OK, but Austrian theory claims that printing money *causes* malinvestments.

But that can only be true if printing money results in “wrong” prices – otherwise, all we could do is blame poor business skills.

But the only way a “wrong” price makes sense in the paradigm of Subjective Value, is if the “right” price is that which conforms to consumer preferences for the means with which to satisfy ends.

The only way prices can be objective, relative to subjective preferences, is if it has a link to use-value.

Look, the fact that money can exchanged for a good which is more valuable to the guy who initially bought something with it does not prove that the value of that money went up do to its function as a medium of exchange.

Rather, all it means is that different people value different things, and someone, somewhere else in the economy, happened to have information that the first guy didn’t have.

This happens under barter, so it shouldn’t be considered to be a separate source of value when using a medium of exchange – the same thing is happening in both cases.

(We barter because it’s cheaper, in terms of opportunities foregone, to trade with someone else. If it weren’t, we’d just make it, ourselves. So, our trading partner has skills or information that we don’t, which is the same thing that’s happening when money buys more, somewhere else in the economy, than the first guy realized.)

I’m saying that it’s not necessary to conceive of a separate source of value that manifests when using a medium of exchange versus when bartering.

It’s not that having an intermediary good, per se, makes profitable trading possible among more people; Rather, it’s the division of labor that lowers the costs of production, and it’s the fact that a good will trade in the future that allows it to be used as money.

Money is the *result* of the division of labor, not the cause of it (which is why we say that sound money emerges naturally out of a barter economy).

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14. Smiling Dave says:

I regret I will have to discontinue this intriguing discussion.
Have a careful look at HA, ch 17 sec 9, where he talks about the case of a money having value to the consumer only because it makes it easier to buy things, and no value as a commodity.
As for printing money creating the wrong prices, that is because prices are determined by supply and demand. Printing money makes businesses think there is less demand for immediate consumption and more demand for investments on long range projects.
I don’t remember an analysis of printing money that emphasizes, or even mentions, wrong prices.

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15. guest says:

“Have a careful look at HA, ch 17 sec 9, where he talks about the case of a money having value to the consumer only because it makes it easier to buy things, and no value as a commodity.”

I already concede this point. Most people using money use it for this reason and don’t concern themselves, in their day-to-day transactions, with what it’s use-value is.

But the extent to which money can express actual consumer valuations for the goods and services used as means to satisfy preferences is the extent to which money’s value as a medium of exchange is derived from its use-value to someone, somewhere, in the economy.

“As for printing money creating the wrong prices, that is because prices are determined by supply and demand. Printing money makes businesses think there is less demand for immediate consumption and more demand for investments on long range projects.”

Prices are always determined by supply and demand, even when the supply of money-substitutes has been artificially increased.

So, there’s nothing about the prices that obtain under such a condition that should lead one to conclude that prices are wrong.

There’s also nothing about customers’ expressions of demand (spending) that should lead them to believe that prices are wrong.

To say that printing money causes price “distortions” (which it does) is to say that there is such a thing as undistorted prices, or “right” prices, or what prices “ought to be”.

What is being distorted, then, since all prices are reflecting the preferences of consumers with access to an inflated money supply?

If not prices, per se, and if it’s logically impossible for consumers to demand the wrong things (there is no deficiency of demand), then it has to be that the trade value of the inflated supply of money-substitutes diverges from the value as imputed from the use-value for the commodity money being substituted.

(Aside: Only money-substitutes can be inflated, since an increase in the supply of commodity money, per se, cannot be a distortion – the marginal utility of the commodity would correctly fall to reflect a real change in scarcity.)

“I don’t remember an analysis of printing money that emphasizes, or even mentions, wrong prices.”

The analysis is expressed in terms such as “artificial credit expansion”, and “artificial boom”. Artificial implies that the prices are wrong – that there is such a thing as a “genuine” credit expansion or boom (which there is).

Again, the only way prices could be “wrong” or “distorted” in a paradigm of Subjective Value is if the prices fail to reflect consumer valuations for the actual goods being used as means to satisfy preferences.

That is, the link between the trade value of the money-substitute and the trade value of the commodity backing it, as imputed from its use-value by someone, somewhere, in the economy, has been severed.

Thank you for your thoughts and your time. They are appreciated.

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16. Smiling Dave says:

Prices are always determined by supply and demand, even when the supply of money-substitutes has been artificially increased.
So, there’s nothing about the prices that obtain under such a condition that should lead one to conclude that prices are wrong.
There’s also nothing about customers’ expressions of demand (spending) that should lead them to believe that prices are wrong.

All that is correct. That’s why the problem is not that prices are wrong.
The problem is of a different nature.
Let’s say a person reads on the internet that Star Wars toys are very popular today. So he invests a lot of money in making them.
Then it turns out that the internet was lying and everyone hates Star Wars. So he lose a lot of money.
Printing a lot of new money is like lying on the internet, in that it makes businesses believe a certain kind of manufacture is in great demand, when in reality it is not.

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17. guest says:

“Printing a lot of new money is like lying on the internet, in that it makes businesses believe a certain kind of manufacture is in great demand, when in reality it is not.”

Remember that, in Austrian theory, the supply of money doesn’t matter. So, what constitutes “a lot”, and how do you know it, before hand, such that you don’t do it?

The answer is that, since you can’t inflate the supply of a commodity, prices in terms of a commodity money will always reflect the “correct” trade value as imputed from its use-value.

Therefore, it’s the printing of money-substitutes in excess of the commodities which are supposed to be backing it, that causes price distortions. It severs the link to use-value upon which economic calculation is based.

(Aside: A commodity’s use-value is *supposed* to go down when it’s supply is increased, so the introduction of a lot of gold, let’s say, will correctly result in higher gold-prices – prices which will not be misleading.)

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18. Smiling Dave says:

I’m posting your comment, and I disagree, but this is not the venue to hash things out, it seems.
Ty for posting and reading my articles.

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19. guest says:

Your site is awesome, and I will keep checking it out.

Thank you for your time.

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20. hi SD,

i have 2 questions for you.

do you still think that bitcoin violates the regression theorem?

are you aware now that bitcoin has a huge amount of non-monetary use cases? (much more than gold)

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21. Smiling Dave says:

Hi Gianni,
Yes. There have been many other monies that violated the regression thm., and it took a few years for them to die. Give it time.

No, I had no idea. What non monetary uses does bitcoin have? Do people eat it or drink it now? Do they make jewelry from it? Let’s not forget, what people might theoretically be able to use it for doesn’t count. What counts is that people are actually using it today right now for a non monetary use. I’m very interested to know what they are doing with bitcoins besides hoarding them.

I’ve talked about both these topics before, see https://smilingdavesblog.wordpress.com/2012/08/03/bitcoin-all-in-one-place/

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22. first of all, let me aplogize for my poor english (feel free to correct any error) and let me tell you that i deeply value your insight and your opinions, i just think you are wrong on bitcoin for lack of knowledge.
i bought my first bitcoin 2 years ago. i thought it violated the regression theorem and i treated it as a lottery. then, 7 months ago, just out of curisity, i looked into bitcoin and had a blast. i realize it had non monetary use cases and i invested into it.

let me explain.
in the beginning it had some kind of value to each early adopters. maybe it was just a mean to say no to gov, maybe it was nerd curiosity, maybe something else, maybe a glimpse of the things to come, but there was value in holding bitcoin otherwise people wouldn’t have paid money for them. these things sure were abstract but an abstract good is as good as any other as long as it lasts.

but let me show now some real current uses.
you can burn bitcoins to stamp an immutable record. i myself used this. thus you can prove the existence of any kind of electronic file. for 5 cents you can have a notary work that could cost you hundreds of dollars otherwise.
you can also pay ransoms. a friend of mine got a cryptolocker malware and he payed the ransom with bitcoin (was the only payment option) or buy illegal goods.
you can also make donations to “hated-by-gov” entities like wikileaks or make unexpensive remittances to other countries saving the money transfer’s commissions.
you can use it for gambling online to bypass local restrictions.

and these are today usecases i’m aware of but there are many more that are already matemathically proved but stil in the making

bitcoin could be used to make provably fair random lotteries, to hold provable fair unrigged elections (at least for the voting part) or to completly anonimize and hide wealth.

but bitcoin is also a ledger. you can use it to list securities. but not some of them, all of them. you can list the dow, the nasdaq, the foreign excanges, all on bitcoin for a tiny fraction of the current cost, all on bitcoin’s protocol.
you can use it to keep track of property, houses, cars and terrains even in third world countries and then you can transact these properties on the blockchain. you can also make smart property: real stuff that looks at the blockchain to recognize who is it’s owner.

and then there are micropayments, machine to machine payments, escrow payments, smart contracts, a universe of new kind of payments that right now are very expensive or impossible but will be near free super easy tomorrow thanks to bitcoin. you can make your browser pay for you in bitcoin if you want.

and these are not all the use cases, these are just the ones i’m aware of. i’m sure there will be many many more in a few years!

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23. Smiling Dave says:

Early adopters are a tiny tiny handful of people. Even all the people now who own bitcoin all over the world are still a tiny handful. And to qualify as a medium of exchange, you need many many many users. See https://smilingdavesblog.wordpress.com/2013/10/15/about-a-medium-of-exchange-having-to-be-in-wide-use/

Many of the uses you mention are just another way of spending bitcoins, meaning using them as money. They are monetary uses, in other words.

The other uses, such as listing the dow and nasdaq, are possible uses, but nobody actually uses bitcoins for that right now. Certainly no one pays \$400 just to have a list of the dow and nasdaq that takes up 13 gigabytes of computer space, when he can see a list for free that takes up no space on his computer on many websites. So until the day that many people actually use bitcoins for all the creative possibilities you have mentioned, it does not qualify as having non monetary use.

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24. why should anyone pay 400\$ to have the dow on pc? that’s not how it works.
it will be free to see the listed companies
it will be near free (tiny fee) to transact the security (where did you get the 400\$ figure anyways?) and the data wont be on pc. you just get bitcoin’s security with no hassle.

and there are uses already available as the notary feature that surely qualify

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25. Smiling Dave says:

I got the \$400 figure from the current price of a bitcoin.

How do they surely qualify if nobody is doing it now?

Let me explain. Hundreds of years ago, say in the year 1,000, if someone found petroleum deposits on his land, it was a huge disaster. he could not grow crops at all, and there was a dnager that the whole thing might burn his house to the ground. he had to abandon the land.

Now suppose someone told him that no, his land is very valuable, because if someone invents an automobile the petroleum will be coveted by everyone. Thus it is very valuable right now, in the year 1,000, even though nobody wants it at all for their car. You see how foolish such a claim is.

So too with bitcoin. It may have many clever uses that nobody actually pays any attention to. But that does not mean it is worth anything at all right now because of those possible uses.

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26. guest says:

“let me explain.
in the beginning it had some kind of value to each early adopters. maybe it was just a mean to say no to gov, maybe it was nerd curiosity, maybe something else, maybe a glimpse of the things to come, but there was value in holding bitcoin otherwise people wouldn’t have paid money for them. these things sure were abstract but an abstract good is as good as any other as long as it lasts.”

The *reason* people thought of it as a way to say “no to gov” is because they thought they were creating a money that was out of the hands of government. So, this is not a non-monetary value.

(Aside: Another version of this argument is that it started out as art – which does, indeed have a use-value – but since the “art” nature of the bitcoins was in it’s supposed use as money, this does not qualify as non-monetary value.)

Nerd curiosity was curiosity about whether or not bitcoins could function as money. This is also not a non-monetary value.

A glimpse of things to come is effectively the same as the nerd curiosity argument.

As for people being willing to pay for something they think is money, that isn’t enough to make it money. Which is why anti-bitcoiners feel comfortable using the “Ponzi scheme” analogy.

An abstract good is not an economic good. If it’s abstract, then you can reproduce it indefinitely, and it’s therefore not scarce and doesn’t need to be economized.

“Abstract” also means that it’s in your head, making prices in terms of “abstract goods” completely arbitrary.

But you can make anything an abstract good by simply assigning random values to things like handfuls of dirt. That way you can just use dirt as money, and the government won’t take that away.

To the pro-bitcoiner, this shouldn’t be a problem, since they are comfortable assigning arbitrary values to bitcoins. Why bitcoins and not handfuls of dirt?

Bitcoins are limited in number, but they don’t mean anything. Again, they are arbitrarily valued, so the fact that they’re limited is irrelevant, since you don’t need to limit the number of something that has an arbitrary value.

It’s arbitrary. If you don’t like the prices in terms of handfuls of dirt, just arbitrarily value it, otherwise. Problem solved if pro-bitcoiners are consistent.

“but let me show now some real current uses.
you can burn bitcoins to stamp an immutable record. i myself used this. thus you can prove the existence of any kind of electronic file. for 5 cents you can have a notary work that could cost you hundreds of dollars otherwise.”

As with the Intellectual property issue, information is not a good – the good in your example is the medium on which some symbols are recorded (a CD).

If you don’t understand the symbols (say, if they’re in another language), then the symbols are not information to you.

Information is *your own* interpretation of those symbols, and therefore is always *your* creation, no matter who recorded those symbols.

Information, therefore is not a good, but an interpretation of symbols. Information is also not a thing and therefore can never be transferred.

What you’re paying for, say, in a speaker or translator, is the *service* of using his property in a way you expect to be meaningful to you when you interpret it a certain way.

And when the symbols are on a digital medium (like a CD), you’re actually expecting your property (CD player) to interpret the information on the CD and output sounds (or symbols) that are meaningful to you when you interpret it in a certain way.

So, the CD is the good, and when it’s used to record bitcoin information, the buyer is assuming that the bitcoin information is information about money.

Since the buyer is wrong about bitcoins being money, this is like the Ponzi scheme analogy. The buyer is paying for something that has no value.

Now, Ponzi schemes to make people rich – but at the expense of others. So, *some* investors in Ponzi schemes may get rich, but that doesn’t make Ponze schemes valuable – it just means that there has been a fraudulent redistribution of wealth.

Same with bitcoins. The fact that they are traded is not enough to make them money, or even a medium of exchange, if the only reason they trade is because people mistakenly believe them to be worth something they aren’t.

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27. Smiling Dave says:

Deep stuff. Not sure I agree with the information thing, but one thing is clear, guest. No need for you to hide behind anonymity. Your mind is active and insightful. Keep up the good work.

Let me add the obvious, that nobody is actually buying anything with bitcoin, just as nobody actually planted those tulip bulbs in their garden back in the days of tulip mania. Those tulips and these bitcoins are exactly the same thing, a wild mania driven by people who have no use for the actual items, and just as the tulips crashed, these bitcoins must crash someday, right along with shares of Google and Microsoft, stocks that pay no dividend and offer nothing to their owners.

DA: But Dave, if people are stupid now, maybe they will be stupid forever. There are suckers born every minute, more than enough to keep all these manias going forever.

SD: Hold not thy breath, Devil.

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28. “The *reason* people thought of it as a way to say “no to gov” is because they thought they were creating a money that was out of the hands of government. So, this is not a non-monetary value.”

why? i think the reason is they thought it was a PROGRAMMABLE money, not just money.

“(Aside: Another version of this argument is that it started out as art – which does, indeed have a use-value – but since the “art” nature of the bitcoins was in it’s supposed use as money, this does not qualify as non-monetary value.)”

why couldn’t it be in the architecture of the program? on the engineering feat?

“Nerd curiosity was curiosity about whether or not bitcoins could function as money. This is also not a non-monetary value.”

why not about the distributed ledger? why not about its cryptography? why not about it’s scripting language?

“A glimpse of things to come is effectively the same as the nerd curiosity argument.”

if i was in the 50s and i thought gold could be used for computers and cell phones, how whould you define it? monetary use case? i dont think so. so why dont you apply the same category for bitcoin?

“As for people being willing to pay for something they think is money, that isn’t enough to make it money. Which is why anti-bitcoiners feel comfortable using the “Ponzi scheme” analogy.”

Again, gold has nonmonetary value because you can use it in the industry. i hope this is clear. do you think a computer program could have a nonmonetary value? if so, why you disregard bitcoin’s nonmonetary value? what do you think smart contracts are?

“An abstract good is not an economic good. If it’s abstract, then you can reproduce it indefinitely, and it’s therefore not scarce and doesn’t need to be economized.”

with abstract i mean enjoyment, pleasure, entertainment, and so on. all these things can’t be replicated.

“Abstract” also means that it’s in your head, making prices in terms of “abstract goods” completely arbitrary.

i enjoy a film. my enjoyment is indeed in my head, but the film’s pryce is not arbitrary. the value i assign to my enjoyment is arbitrary as austrian theory tells us.

“But you can make anything an abstract good by simply assigning random values to things like handfuls of dirt. That way you can just use dirt as money, and the government won’t take that away.”

what i meant with “abstract good” is the feeling that a bitcoin gives to its owner whichever it is. hope this is clear

“To the pro-bitcoiner, this shouldn’t be a problem, since they are comfortable assigning arbitrary values to bitcoins. Why bitcoins and not handfuls of dirt?”

bitcoins are useful, dirt is not.

“Bitcoins are limited in number, but they don’t mean anything. Again, they are arbitrarily valued, so the fact that they’re limited is irrelevant, since you don’t need to limit the number of something that has an arbitrary value.”

every good is arbitrarily valued by each individual on earth. bitcoin is no exception. it has value because it’s useful in some kind of way.

As with the Intellectual property issue, information is not a good – the good in your example is the medium on which some symbols are recorded (a CD).

ok, let the good be the hard disk containing the blockchain. so what about the key that let you write in that hard disk?

“If you don’t understand ….. So, the CD is the good, and when it’s used to record bitcoin information, the buyer is assuming that the bitcoin information is information about money.”

when i buy bitcoin i do not assume they are information of money, and a lot of other guys i know think likewise. so your example is refuted by at least some hard evidence.

“Same with bitcoins. The fact that they are traded is not enough to make them money, or even a medium of exchange, if the only reason they trade is because people mistakenly believe them to be worth something they aren’t.”

something is worth IF AND WHEN it has value to a person. bitcoin has nonmonetary uses, so as long as people (like me) value those nonmonetary uses bitcoin has a legitimate value.

think about a coupon that gives you a car in 5 years. does that coupon have value? of course! can those coupons be used as money? the regression theorem says they can. if every human being stops valuing cars, do those coupons lose all of their value? yes. is this outcome likely? no!

think about bitcoin that will have a lot of nonmonetary uses in 5 years. does bitcoin have value? of course! can bitcoin be used as money? the regression theorem says it can. if every human being stops valuing it’s nonmonetary uses, do bitcoin lose all of its value? yes. is this outcome likely? no!

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29. @SD

“I got the \$400 figure from the current price of a bitcoin.”

bitcoin is divisible so you could have got any other value you wanted.

“So too with bitcoin. It may have many clever uses that nobody actually pays any attention to. But that does not mean it is worth anything at all right now because of those possible uses.”

if something is usefull in 1000 years it probably has no value, if something is useful tomorrow it probably has a lot of value. you just discount the whole thing with time preferences
bitcoin will be useful in a couple of years. it’s not a long time to wait. a lot of people are waiting and are convinced the future is near.

“Let me add the obvious, that nobody is actually buying anything with bitcoin”

you are wrong. a lot of people are buying a lot of things with bitcoin just right now. cars, houses, pc games, ransoms, drugs, amazon stuff, pc programs, etc..

right now there are 240k transactions every day on bitcoin. https://blockchain.info/it/charts/n-transactions

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30. Smiling Dave says:

About bitcoin being valuable in the future because of new uses, and discounting because of time preference.
Value is subjective, meaning ultimately it is people living right now who determine its value right now. And almost everyone on Earth cares not at all about possible future uses of bitcoin. People who buy it now do not buy it because someday they will have all kinds of fancy uses for it. If you told a potential that he will never get back his investment, but will maybe someday be able to use the bitcoin he paid for to do something or other with it, he will not pay a cent for it. Nobody cares today about possible future uses of bitcoin.

Those 240k transactions are people buying and selling bitcoins for cash, but nobody is buying a house or car with it. OK maybe three or four people every year worldwide.

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31. Smiling Dave says:

The key refutation is that to be a medium of exchange, or a money, a Thing X has to start off in wide demand for some non monetary use. Meaning most of the people you know have to covet Thing X, and be willing to sell anything they usually sell in exchange for Thing X, because they want it so badly. You need many many many many people to want it, not a small handful.

And that has never happened to bitcoin. There was never a huge crowd of people who wanted to eat or drink bitcoins, or do anything else with it but gamble that it will go up in price. There was only a tiny handful of people who wanted it to eat or drink or other non monetary use. Do a search for “wide demand” on this site.

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32. guest says:

“Again, gold has nonmonetary value because you can use it in the industry. i hope this is clear. do you think a computer program could have a nonmonetary value? if so, why you disregard bitcoin’s nonmonetary value? what do you think smart contracts are? ”

Bitcoins have zero non-monetary uses; You’re trying to equate the distributed ledger with bitcoins, but a distributed ledger can be used with all kinds of actual goods.

Which means that if you’re going to value bitcoins based on the distributed ledger used to track them, then logically you’ve got to include every other good that *can* be tracked the same way in your definition of money, thereby vastly increasing the “digital currency” money supply beyond even the artificial limits imposed by the programmers.

Aside: I reject the concept that information is a thing, and so I reject the idea that a computer program is a thing.

Rather, the communication and storage of symbols *called* a program is actually a service, not a good.

A good would be the CD or computer used to record the symbols. Nothing is information until someone pours his own meaning into it – the intent, of course, being to pour the same meaning into it as its programmer.

Aside #2: I’m not going to respond to all of your comments, some of which I didn’t read.

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