Home » Uncategorized » Four Valuable Lessons From Actually Reading the Regression Theorem.

Four Valuable Lessons From Actually Reading the Regression Theorem.

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Ever since bitcoin lost 80% of its value in less than a day, again, there has been renewed interest in bitcoin.

Over the years, Smiling Dave has been asked over and over why fiat currency, which has no intrinsic value, has thrived, while Dave insists that lack of intrinsic value is a death blow for bitcoin and ensures it will never thrive. Is Dave picking on poor defenseless, bitcoin? Is he playing favorites?

Let me explain with a homely story.

A fishmonger has a stand in the market place. There are bins for the different kinds of fish. Every bin has a little sign declaring the price of the fish in that bin.

One day, a strong wind blows away all the signs. Our fishmonger does not have a good memory, and forgets what price to charge for the different kinds of fish. Luckily his honest customers do remember what they paid for the various fish in the recent past. Using their info, he gets the prices for all the bins but one.

“What about this new fish called bitcoin?” he asks everyone. “What is the price of it?”

“Dunno, worthy fishmonger. I never paid for one before.”

You get the idea. It’s not mine, it’s Mises’s. When the dollar goes off the gold standard, people grant it the purchasing power it had yesterday, when there was a gold standard. But like that smelly new fish, bitcoin has no yesterday to go by. When people are offered a bitcoin in payment, they have no clue what its value is.

[And don’t tell me they can look it up at mtgox.com, that volatile madhouse].

Here’s our man Mises giving bitcoin the smackdown in his Theory of Money and Credit. His words in italics, my snarky inserts in normal font and in brackets.

The Necessity for a Value Independent of the Monetary Function Before an Object [Like Bitcoin] Can Serve as Money

If the objective exchange value of money must always be linked with a preexisting 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),…

[There it is folks, right there. The bitcoin fish nobody ever bought gives people no position to estimate its value, because it has no yesterday, no pre existing market exchange value].

…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.

[Note that Mises insists that its value must be based on some other use. Some other use, not on the fact that it costs money to mine bitcoins, or that its costs money to have ethernet to own a bitcoin, or any costs of production nonsense. Use, my friends, use. It must have some other use. That’s what Mises is saying.

His reason, of course, is that when somebody goes to buy a thing, he could not care less how much it cost to make it. He only cares about the use it has to him.

Now some have pointed out that companies have a formula for how much to charge, costs of production plus standard profit margin. But that is not why the customer is willing to pay that price. The price he is willing to pay is based on one thing only, the usefulness to him of the object. The companies’ formula is an estimate and a guess of what they can get away with charging, coupled with what they have to charge to stay in business. But we digress.]

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 bitcoin] [4] and a confirmation of Menger’s hypothesis concerning the origin of the use of money.

[Once again, we see something very important. Noobies to Austrian Economics totally lose it when they see the words “intrinsic value”. Like a fish snapping at bait, they will snap and say that all value is subjective, and there is no such thing as intrinsic value. Well, dear reader, now you know they are mistaken. Mises himself uses the phrase. My humble article Bitcoin All in One Place, or this one, explains this seeming paradox. But we digress.]

OK, so far Mises has explained with crystal clarity why bitcoin is like that smelly fish that nobody ever bought before, and that therefore it can never be money.

But what about fiat money. It is also intrinsically useless, no? And Mises gives us the answer. At least it has a yesterday! Bitcoin does not.

This link with a preexisting exchange value is necessary not only for commodity money, but equally for credit money and fiat money. [5] No fiat money could ever come into existence if it did not satisfy this condition. Let us suppose that, among those ancient and modern kinds of money about which it may be doubtful whether they should be reckoned as credit money or fiat money, there have actually been representatives of pure fiat money. Such money must have come into existence in one of two ways. It may have come into existence because money substitutes already in circulation, that is, claims payable in money on demand, were deprived of their character as claims, and yet still used in commerce as media of exchange. In this case, the starting point for their valuation lay in the objective exchange value that they had at the moment when they were deprived of their character as claims. The other possible case is that in which coins that once circulated as commodity money are transformed into fiat money by cessation of free coinage (either because there was no further minting at all or because minting was continued only on behalf of the Treasury), no obligation of conversion being de jure or de facto assumed by anybody, and nobody having any grounds for hoping that such an obligation ever would be assumed by anybody. Here the starting point for the valuation lies in the objective exchange value of the coins at the time of the cessation of free coinage.

Before an economic good begins to function as money it must already possess exchange value based on some other cause than its monetary function. But money that already functions as such may remain valuable even when the original source of its exchange value has ceased to exist. Its value then is based entirely on its function as common medium of exchange. [6]

That’s the essence of the regression theorem. Ponder it well.

So we have learned 4 valuable lessons from reading the regression theorem in the original.

1. Every money needs a yesterday, meaning “[it must be] linked with a preexisting market exchange ratio between money and other economic goods”. Bitcoins have no yesterday, so they have no today or tomorrow either.

2. Cost of production is not a valid yesterday.

3. “Intrinsic value” is a meaningful and appropriate phrase, in the proper context, even given that all value is subjective.

4. Fiat money has a yesterday, and thus does not violate the regression theorem.

At this point, some may object. “But bitcoin now has a price.” “But bitcoin has a yesterday.” “But bitcoin proves the regression theorem wrong.” My sons, go to my article Bitcoin All in One Place for Enlightenment.



  1. Jacquelyn says:

    I am regular reader, how are you everybody?
    This paragraph posted at this web site is in fact good.


  2. Smiling Dave says:

    TY Jacquelyn.
    How did you find this site? What have you learned from it?
    What are your opinions on the topics raised here?


  3. anarcholibertarian says:

    I’m loving this blog more and more. I love the snarkiness. I love the laid-back way you break things down. And I love that you respond to comments, the answers of which I find very helpful since many times I find myself having the same questions.

    I was surprised when you showed that Robert Murphy doesn’t understand the regression theorem. He got knocked down a few notches on my totem pole. In fact I think this whole bitcoin debate is a useful tool to sift through which Austrians naturally think logically and which don’t.

    Anyways, our buddy David Kramer made a comment about this article which I am also wondering about. He says:

    “‘4. Fiat money has a yesterday, and thus does not violate the regression theorem.’

    If by ‘fiat’ he means the paper FRNs which forcefully/fraudulently replaced U.S. Gold and Silver certificates (which, in and of themselves, REPRESENTED something of value and were not the valued commodity itself), he’s wrong.”

    Could it be that government force is the only reason why the dollar is in general use? What would happen if the government told everyone to use a random token or they will be shot? I’m thinking that it will be volatile in price, since no one knows how much 1 token is worth compared to 100 tokens, but it would still be in general use out of fear. I’m still reading through your bitcoin articles, so if you have already answered this, just point me in the right direction if you please.


  4. Smiling Dave says:

    I just wrote an article, Deep Stuff About Fiat Money, in reply to your comment.

    Thank you for the kind words. They cheer me up.


  5. Very nice post. I simply stumbled upon your blog and wanted
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    In any case I’ll be subscribing to your feed and I’m
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  6. Smiling Dave says:

    Just so we know you’re not spam, what is my blog about?


  7. Ian says:

    You are blind. Bitcoin’s Value Independent of the Monetary Function initially was linked either from experimental and potential uses of it’s technological feats or to the use it’s network had as the first cheap, fast and decentralized (no need for a third party) global payment system or a combinations of factors.
    But fact is Bitcoin surely had initial Value Independent of the Monetary Function. It’s price has kept going up for a reason.


  8. Smiling Dave says:

    Bitcoin was able to perform technological feats? Like what? To this day, nobody who buys bitcoin knows or cares about those technological feats, and certainly the first buyers of bitcoin had no clue about those supposed feats.

    Bitcoin’s Value Independent of the Monetary Function ..global payment system…

    A payment system is precisely what the monetary function is. So you are saying it had uses, not as a monetary function, but as a monetary function. You see the problem.

    It’s price has kept going up for a reason.

    Yes indeed, the same reason all items in a bubble go up. Yoour argumnet seems to be as follows:
    1. Nothing goes up without a reason.
    2. One of the many possible reasons something goes up is that it has non monetary value.
    3. Therefore, of the many possible reasons, that’s the one, because I like that one.

    You see the problem.


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