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Tuesday, December 20, 2011

Bitcoin and Mises Regression Theorem.

Link: http://www.libertariannews.org/2011/07/07/the-economics-of-bitcoin-challenging-mises-regression-theorem/

One M. Suede has posted a challenge to Mises Regression Theorem. His purpose is to prove bitcoin is a viable currency, and anyone who disagrees is just stamping his feet in frustration at the facts.

For Smiling Dave's take on the regression theorem, with lengthy quotes from Mises, see here.

We quote Mike's words in italicized font, and our commenst will be in normal font. Here's what Mike has to say:

There is a lot of disdain for Bitcoins by the Austrian gold bugs for a few reasons.  The primary reason is that, well,  they are all holding gold!  It stands to reason that they don’t like potential threats to their investment holdings. 

Ad hominem strikes again! C'mon, Mike, you can do better than that. And to think the existence of 32 million dollars worth of bitoins is going to threaten the price of gold is a good laugher.

I’m going to come right out and say it – Mises was wrong.

But first, he explains to us why, even if Mises was right, bitcoins are great stuff:
The essence of the argument is that

1. bitcoins started their existence as having a well defined rate of exchange, and...

2. that's all you need to satisfy the regression theorem, as he quotes Rothard to prove.

I concede 2., but 1. is a big mistake. Let's quote the man:

The very first businesses in the Bitcoin economy were exchangers (NewLibertyStandard, BitcoinMarket, BitcoinExchange,….).  This is not an accident, but flows from the analysis above.  In order for Bitcoins to serve as a medium of exchange without commodity value for uses besides indirect exchange, there must be a translated knowledge of money prices.  Market exchangers fill this gap and give Bitcoin users access to this knowledge.  Bitcoins may therefore currently serve as a money intermediary for paypal dollars\pecunix\euros.  But why is there demand for Bitcoin over USD??  This is a subjective valuation arising from properties such as anonymity, decentralized system of clearance, cryptographic trust, predetermined and defined rate of growth, built in deflation, divisibility, low transaction fees, etc…. inherent to the Bitcoin system.

Those who read Smiling Dave's blog all the way down to the comments already know why this is an ignorant blunder. Here's the argument, reprinted for your convenience:

If you and your kid sister set up a system of paying each other for lollipops with tarot cards, that doesn't make tarot cards money, right? And why not? Because money has to be something accepted
1. by a whole community
2. in exchange for anything and everything.
That's what medium of exchange means.

When everything can be bought with tarot cards, from a large group of people, not just a few close friends, then they can be legitimately called money.

Bitcoin is not money yet, because there is no community, [even if we call a group of people connected by computers a community], who will buy and sell everything for bitcoins. A few geeks is not a large enough population to count. Even all the bit coin users alive today is not enough. And a few slices of pizza and some software is not enough. EVERYTHING has to be buyable in bitcoins.

The defense rests. Now Mike is going to tell us why Mises is wrong, to boot.
Tell you what, I'll paraphrase, because he is very long winded. You have the link if you want further clarification, or to see if I am summarizing him correctly.

1. He begins by saying that mankind understands the need for money. Having money is so much more convenient than having to barter directly. [Agreed]

2. And then they will realize what makes a good money, fungibility etc, as economists have listed in their works. [Agreed].

3. Finally, they will understand that bitcoin has all the requirements of a good money par excellence, except for that insignificant unimportant detail that it is actually usefull for something or other besides handing over to the next guy. [Agreed]

4. Therefore bitcoin will be accepted as money, and Mises has been shown wrong. [Disagree].

Here's where Devil's Advocate protests vehemently.

DA: Dave, you agreed with all the assumptions, so you must agree with the conclusion. He's got you now, mwahahaha.

SD [=Smiling Dave]: I disagree with one tiny thing in point 3, which destroys his whole argument.

DA [suspiciously]: Oh? And what would that be, pray tell?

SD: Being useful for something besides handing it over to the next guy is not an insignificant unimportant little detail. It's the very DEFINITION of money.

DA: Says you.

SD: Yes, says me, and I have explained it and proven it at great length in two of my previous posts. One of them was actually a rebuttal of Mike's earlier writings, where he said the same thing he is saying now.

DA: And where are the links to these so called proofs?

SD: I'm glad you asked. Here ya go:

Short short version, cuts to the chase: http://smilingdavesblog.blogspot.com/2011/07/bitcoin-yet-again-in-simple-language.html

Rebuttal of Mike's earlier article, and explanation of the regression theorem: http://smilingdavesblog.blogspot.com/2011/06/bitcoin-takes-beating.html

A wonderfull analogy to make it all clear, based on The Emperor's New Clothes:

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