One More Detail about Bitcoin

The latest claim is that bitcoin is ALREADY a money, or a medium of exchange at the very least, and so of course bitcoins very existence proves Mises wrong. Take that, Mises, with your stuffy old logical thinking, Mike is saying. Your regression theorem claims to prove bitcoin cannot exist as a money, because it is a money coming into existence with no intrinsic value, but here it is, existing and a money.

Here's what these guys don't get. To be a medium of exchange, and certainly to be a money, a thing has to  generally accepted by a wide audience. Now ecoomists have not given precise numbers for this, but bitcoin certainly isn't acepted enough, as I will make crystal clear.

I guess the best way is to just copy what I wrote in the forums. So here it is:


Time to spell out what people don't seem to grasp.
Pete thinks 10,000 people owning a bitcoin makes it a medium of exchange. Sorry Charlie, and no way Jose.
And why not? Let's go back to first principles.
A man works hard and produces something, say he's a carpenter. He wants to buy all kinds of stuff in exchange for the chest of drawers he has built. There is a mortgage to pay, food to buy, cable TV bills, dozens and dozens of things he needs and stores he will have to go to.
Along comes Pete and offers to buy his work for 30 bitcoins.
"What the heck can I do with this garbage?" says the carpenter?
"Plenty," says Pete. "If you go to the bitcoin convention we had a month ago, you could have bought a beer. Even now, there is a store in NYC that will sell you a pizza, and hundreds of tiny online stores you never heard of and have no reason to trust that will sell you flawed software and crappy trinkets. There are 10,000 people all over the world who will buy your bitcoin at widely fluctuating prices, maybe. We're talking about the most versatile medium of exchange in the history of the world."
What will the carpenter say, if he is polite? "I don't need that right now, thank you very much. Come back when I can buy anything with it, from anybody. Or at least from enough people that I can buy whatever I want. Until then it's not a medium of exchange, but a fraud. Have a good day."
Generally accepted. Widely used. Write it down.

The above scenario also refutes Mike's claim that bitcoin has already done what Mises claimed was impossible, to wit, become money. No. It hasn't done anything. It's current situation is not one of being money.

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.

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:
http://smilingdavesblog.blogspot.com/2011/06/bitcoin-and-bitclothing.html
 
Sayonara.