Someone over at reddit linked to Bob Murphy’s discussion on bitcoin. He points out that Bob at around the 26 minute mark uses “medium of exchange” to mean one person making one trade. He says this refutes my assertion that medium of exchange means tons of people using it.
Here’s my reply.
Bob makes several mistakes in that off the cuff, unprepared “ramble” [=his description].
First he claims that in Money and Credit Mises is giving a history lesson. I refuted that long ago, quoting exactly where Mises writes that he is not writing a hsitory lesson about gold, but about every money that exists, will ever exist, and ever existed: https://smilingdavesblog.wordpress.com/2011/12/21/was-mises-regression-theorem-a-mere-history-lesson/
Second, he claims that according to the regression theorem [if it is not a history lesson], it is impossible for even one person to use bitcoin as a medium of exchange. This is patently false. Murphy forgets the adage that there is a sucker born every minute. There are enough fools and suckers out there to make anything possible, on a small scale and for a short length of time. I have a long list of things that were used as money, not just a medium of exchange, for a short time and on a small scale. And they all collapsed for the very reason that Mises pointed out in the regression theorem: https://smilingdavesblog.wordpress.com/2012/10/07/bitcoin-and-the-numbers-game-part-2-in-which-we-shew-that-bitcoin-has-never-not-even-once-been-used-as-a-medium-of-exchange/
But I will be honest and say that the phrase “medium of exchange” is used in two ways by economists. Sometimes it is used the way Murphy did, to mean a one-off use by one person. I have pointed this out in the forums and on my blog.
But let’s have a look see at this quote from Timothy Terrel [=associate professor of economics at Wofford College in Spartanburg, SC, and an adjunct scholar with the Ludwig von Mises Institute], who writes:
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’…”
Widespread demand before it can even be a medium of exchange? All it takes is three people willing to use it one time, a la Bob Murphy. Whatever can this adjunct professor with the Mises Institute possibly mean?
Obviously, he understands “medium of exchange” to mean “non trivial medium of exchange”. Which is the way I use it, as well.
Bitcoin can only become a money in the future of it at first “in general use“. It must have a “widespread demand” before it is used as a medium of exchange, if by medium of exchange we mean non trivial medium of exchange.
But really, it’s just a question of semantics. Whether the phrase “medium of exchange” includes the concepts of being in general use with widespread demand, and whether it doesn’t, is of no importance. What does count is that in order to have a chance at ever being money, the thing in question “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 money. We have explained why this is many times on our humble blog. Do a search for bitcoin.