Home » Uncategorized » Was Mises’ Regression Theorem a Mere History Lesson?

Was Mises’ Regression Theorem a Mere History Lesson?

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gold or gold substitutes can lose or be deprived of their direct use function and still continue as money; for the historical reference to a previous day’s purchasing power will already have been established.*53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 thinks that a couple of guys at a small convention using bitcoins for a couple of days is enough to prove bitcoin is money. Grow up, Pete. 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. [An in joke, don’t worry about it]. Which means George Selgin and Pete Kinsella and Phil Bagus goofed on this one. Sorry guys.

One last minor note in this head hunting piece, written under the influence. 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. Well Mises right here used the phrase intrinsic value. Put that in your pipe and smoke it.


17 Comments

  1. Glader says:

    Hi again Dave, another stupid question: Would the price of the electricity needed to mine a BitCoin not represent its intrinsic/initial value?

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  2. flyingaxe says:

    What about euro? Wasn’t it created as a de novo fiat currency?

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  3. Smiling Dave says:

    Yes it was. But it was linked to the previous currency when it was created, which was linked to gold when it was created. At each step of the way, people knew exactly what what they were getting.

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  4. flyingaxe says:

    So, why shouldn’t the same happen to bitcoin? At every step of the way, people know how much they get for a bitcoin, just like they know how much they are getting for a euro. And they may come to prefer bitcoins over dollars or euros because they are less (or not) inflationary.

    I.e., you (and Mises) might be right that bitcoins would not arise spontaneously as a currency if every fiat currency would go up in smoke tomorrow. But as long as some fiat currency is accepted as money (and argue as much against it as you want, but I bet you take dollars as payment for your job; and if you want to buy some beer, you trade it in for the hateful green toilet paper; if that’s not the case, I’d like to know), bitcoins can become money on top of it, just like euro.

    What am I missing?

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  5. Smiling Dave says:

    At every step of the way, people know how much they get for a bitcoin…

    The market for bitcoin is volatile. Nobody pretends to know what its price will be two weeks from now.
    Especially if someone tries to sell a large quantity, which may very well collapse the whole market.
    This has happened time and again to moneys that were given an arbitrary initial value. Do a search on this humble blog for the Ithaca Hour.

    Just in general, to help you get a feel for what the real world thinks about bitcoin, ask all your neighbors and non nerd friends, a sampling of the vast majority of the universe, a few questions:

    1. Have they heard of bitcoin?

    2. Are they willing to exchange their paycheck from now on completely into bitcoin?

    3. How much will their weekly bag of groceries cost them in bitcoins?

    4. Tell them you are a bitcoin dealer and get a tiny commission from every bitcoin they buy. How many bitcoins do they want today?

    5. How much will they pay now for a delivery of bitcoin in two weeks?

    6. What are the first ten things they will buy with a bitcoin?

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  6. flyingaxe says:

    But now you’re making a different argument: that the markets are volatile and underdeveloped. But that doesn’t mean it is not money today and cannot become a more widely used money in the future; it all depends on how popular it becomes.

    In principle, the same is true for anything that has intrinsic value: for instance, if I argued that silver buttons can be used as money today, you could ask the same questions about those. But they *have* been used as money in the past (19th-century England) after they became a popular replacement for the state-issued currency.

    I.e., if you want to argue that the activation energy for something like bitcoin to become money is too high, I won’t argue; I simply don’t know. But if you’re arguing that bitcoin cannot in principle become money due to the Regression Theorem, then I don’t see how that makes sense because of what I wrote in the previous post.

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  7. Smiling Dave says:

    I’m not talking about activation energy at all.

    As for silver coins, they have intrinsic value, obviously. So that a person offered a silver button would have an estimate in his mind of how useful it is for him, and that would be its initial value.

    And it’s not a different argument. The argument is always the same. Since a bitcoin in and of itself, meaning not to pass on to the other guy, is useless, the only value it has is guessing how much the next guy will trade it for. Such a value is meaningless to most people, who want to get something they know with close to certainty they will be able to use to buy what they want. Why should the next guy not wise up and decide, you know, I’m only going to give you ten units of widget instead of twenty. Take it or leave it. Nothing to stop him. The whole so called market may collapse in a moment, just like the Ithaca Hour did and all those other monies, and for the same reason, because it has no use intrinsically. And right now it’s certainly not in wide demand. Why should I gamble that it ever will be?

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  8. david goldstone says:

    Hi Dave

    re:

    “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”

    why must the pre-existing ratio be derived from the use of the object as a commodity as opposed to, for example, “general agreement to impute value X to things intrinsically worthless”? Either would seem to suffice.

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  9. Smiling Dave says:

    I notice you added an X to the quote. In other words, you get why a general agreement to impute value, but no agreement as to how much value, is useless.
    So you are asking. “How about a general agreement to impute the value of Ten dollars to One Ithaca Hour?” with the Ithaca Hour being a piece of paper that is intrinsically valueless.

    Obviously, that decision, of exactly ten dollars, was arbitrary. But, hey, if we all agreed to it, why not?

    I think that yes, if the reality was that everyone agreed to that, it would work. But there are a few practical problems.

    Notice that there would be big losers from such an agreement. Whoever did not have any Ithaca Hours in his possession would have to give his stuff away to whoever did get the first Hours. This is exactly the problem known as Cantillon effects that exists with all printed money. Why would anyone agree to that?

    Also, it could only happen in there was a pre-existing money, like dollars. Otherwise, there would have to be universal agreement about how many apples an Ithaca hour could buy, and how many oranges, and how many cups of coffee, and how many theater tickets, and on and on, an almost endless list that had to be agreed on. Does not seem possible in the real world. And even when it comes to apples, one farmer would say his apples are worth a bit more than other people’s, and a convenience store would say it wants to charge more for its apples [as is the case nowadays with dollar prices], and everyone had to agree to every single detail. Not likely.

    Moreover, even when there was a pre-existing money to compare the new money against, why would there be such a general agreement? What’s in it for me? Historically, as Mises writes in Money and Credit, every attempt by a govt to make people accept a coin worth that’s only 95% gold as being worth the same as a coin of pure gold, and enforced this law with heavy fines and death penalties and sermons from the pulpit, it didn’t work. Why would it work in such a case, of a totally useless object being valued as a gold coin? [Note that Mises discussed why fiat money is different, see Money and Credit].

    Who will organize this general agreement? Would all men leave their farming, all women their babies, to attend a meeting about a subject of such monumental unimportance? What’s wrong with using whatever money they had until now?

    Who would feed and house the masses during this Woodstock-like gathering?

    In short, it clearly never happened yet, and although in theory it might someday, that masses of people will agree to lose a lot of money for no reason, the odds of it happening are basically zero.

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  10. david goldstone says:

    Thanks Dave. My point was more a conceptual one. The regression theory seems to be based upon a simple and obvious proposition that for money to function as a medium of exchange, users need to have some way of ascribing an exchange value to it. That is plainly correct. A pre-existing commodity value is the obvious route but it is hard to see why, logically, it has to be the only route. As you have agreed, “in theory” at least a pre-existing agreement could suffice, though for all the reasons you give, it is extremely unlikely in practice. Another route would be to conduct a first transaction at some arbitrary rate of exchange (e.g. 10,000 units of the new money for a pizza) and then allow the market to adjust the rate. This ought to suffice – all that is required is that users are able to ascribe an exchange value. Logically it must be immaterial what the historical roots of that value are. You see where I am going with this ……

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  11. Smiling Dave says:

    The market adjusted the rate right away, to zero. The guy who was willing to hand over a slice of pizza for bitcoins was an outlyer, like the guy who paid 15 years worth of wages of a skilled craftsman for a tulip. To this day, most people on Earth, or in any given area, will give you zilch in exchange for a bitcoin.

    Many things are subject to manias and foolish decisions by groups of people. The price of something or other goes up beyond all reason, only to drop like a stone very suddenly, and forever. History is full of examples. An economist’s job is to figure out what is sustainable, and what is a passing fad that must end, and badly.

    My articles on bitcoin lay out why what we are seeing must be a fad and a foolishness that will end badly for all bitcoin holders.

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  12. david goldstone says:

    Dear Dave. I have read your postings on this subject. They are impressive. You clearly know your stuff and have given a lot of thought to the topic. However, I do think you are in error. The reasoning behind the regression theory has nothing to do with the notion that money must logically take the form of a commodity. Mises’ point was surely (just) that for a new money to emerge, there must be some means of attributing value to it. Whilst commodity money is the obvious route, it is not logically the only such route (as I think you concede). Bitcoin satisfies this requirement because the market now attributes a value to it. How that came about is of historical interest only. I think Mises would be horrified at the commodity-money fetishisation that is put forward in the name of the regression theorem. Whether bitcoin is indeed a fad and a foolishness will turn upon whether it offers sufficient advantages over existing forms of money, that it becomes widely adopted. This is not a question that can be answered by reference to abstract principles, any more than one can assess the potential of a company stock in the abstract. It is a technical and sociological question. One other consideration. Apart from being a financial innovation of potentially great importance, Bitcoin is also a marvellous free market experiment (Cathy Reisenwitz has given a nice talk on this – http://bitcoinmagazine.com/7437/cathy-reisenwitz-why-a-free-society-needs-a-free-money/). So I do hope that influential libertarians such as yourself can be persuaded of the error of your ways. Bitcoin is going to need all the support it can get in the face of the inevitable Statist onslaught. Best wishes. David

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  13. Smiling Dave says:

    Mises in HA, [right after explaining the reg. thm]:
    As action always aims at a more satisfactory arrangement of future conditions, he who considers acquiring or giving away money is, of course, first of all interested in its future purchasing power and the future structure of prices.

    Makes sense, no?

    In other words, if you do not know what it is going to be worth tomorrow, you won’t touch it. Now with real money, as opposed to bitcoin, you can get an inkling of its future value from its past value. But with a fad like bitcoin, which has a history of wild fluctuations, and no reason whatsoever to assume stability, you have no idea at all of its future value.

    Unless you can tell me that you have some kind of clear picture of the value of bitcoin six months from now, and on what you base that picture, then having a market value today is not good enough. When tulips were selling for 15 years worth of the wages of a skilled laborer, and you were around at the time, would you have said that all is well, the tulip is certainly going to sell at that price for a long time, because that is the market value today? Or would you have suspected there is a fad and folly going on?

    BTW, check out my recent article on bitcoin and Gresham’s Law, which explains exactly what is happening to bitcoins as we speak. 97% of them are hoarded, exactly what Gresham’s Law predicts. And the future of bitcoin is also predictable based on G’s Law.

    Now I certainly agree there is a problem with govt money, and it would be nice to have an alternative viable currency. Key word, though, is viable.

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  14. david goldstone says:

    “Unless you can tell me that you have some kind of clear picture of the value of bitcoin six months from now”
    This all seems rather ad hoc. One might say the same of any kind of money. The dollar could well collapse within the next six months (and is highly likely to do so within the next few years) but so what? Uncertainties of this kind are simply incorporated into the current market-determined exchange value. These are just questions of degree and do not raise any question of principle that I can see.

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  15. david goldstone says:

    “When tulips were selling for 15 years worth of the wages of a skilled laborer, and you were around at the time, would you have said that all is well, the tulip is certainly going to sell at that price for a long time, because that is the market value today? Or would you have suspected there is a fad and folly going on?”

    Although not directly relevant, this is all a bit of a myth. Look at the Wiki page under “legal changes”. It was not a question of fad and folly. The notional “price” during the winter of 1636/1637 simply reflected a legislative a re-allocation of risk from buyer to seller .

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  16. Smiling Dave says:

    Sounds so reassuring. But we have to remember that there is a huge difference between a gambler and a normal person. They are in fact opposites. A gambler likes big risks and big rewards. A normal person wants no risk at all when getting paid. Ideally, his money will be guaranteed to be worth exactly the same forever as the day he gets it in payment.

    He doesn’t say to himself, “Oh, well, only a question of degree. I’ll just incorporate the uncertainty into the current market determined exchange value of my wages, and ask for a little more. I mean, I may lose everything if I get paid in bitcoins, but so what, right? I mean, an asteroid might fall me on me, too, but I’m not losing any sleep over that.

    “This bitcoin may go down to zero in six months? And all my savings will be wiped out? Well, that’s a risk well worth taking, because look how safe and secure and cryptographic bitcoin is, and how libertarian.”

    As for the dollar, there is a constant never ending hype machine reassuring everyone that everything is fine. Most people believe it, if they think about it at all. But a new animal like bitcoin will either be rejected out of hand as unfamiliar, or investigated. And then those wild swings will show up clearly on the graphs.

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