"Most people are in arrested development and cannot use logic." Jacob.
"Competition and capitalism are hated to-day because of their tendency to destroy poverty and privilege." William Hutt
"America is unique in that our economy is totally dependent on global charity." Peter Schiff

Tuesday, December 20, 2011

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gold or gold substitutes can lose or be deprived of their direct use function and still continue as money; for the historical reference to a previous day's purchasing power will already have been established.*53 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

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.


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

    1. http://smilingdavesblog.blogspot.com/2012/07/bitcoin-and-intrinsic-value.html