Monday, October 14, 2013

Bob Murphy on Bitcoins, Money, Mediums of Exchange and the Regression Theorem

Murphy writes:
In my current project for the Independent Institute I’m going methodically through Human Action, and can now make my case much more simply. Mises didn’t make his case of the regression in terms of money, he made it directly in terms of a medium of exchange[...] here’s Mises from page 407 (Scholar’s Edition): “[N]o good can be employed for the function of a medium of exchange which at the very beginning of its use for this purpose did not have exchange value on account of other employments.” And later on page 423:
A medium of exchange without a past is unthinkable. Nothing can enter into the function of a medium of exchange which was not already previously an economic good and to which people assigned exchange value already before it was demanded as such a medium.
So my point is, the certain group of Misesians who keep deriding Bitcoin and saying it will eventually collapse, it’s a passing fad, it will never take off beyond internet geeks, etc. etc., because of Mises’ regression theorem, aren’t making any sense. Mises’ regression theorem wasn’t making an empirical prediction about a medium of exchange never attaining the status of money, unless it started out as a regular commodity. No, Mises is saying we can’t conceive of even a medium of exchange (which is a weaker condition than money) that didn’t start out as a regular commodity. Bitcoin is clearly, unequivocally a medium of exchange right now. There are websites where people trade Bitcoins directly for “real” goods. There are people who will sell a “real” good for Bitcoin, intending only to trade away the Bitcoin in the future for something else “real.” Thus Bitcoin is right now a medium of exchange, no doubt about it.

So, am I saying Mises was wrong? Not necessarily. If you want to reconcile his claims with the existence of Bitcoin, you can argue along the following lines: What actually happened is that in the very beginning, when Bitcoin was first introduced and no one had any idea of its purchasing power, the very first people to trade for it did so because it provided them with direct utility because they knew there was at least a chance that it would serve to chafe the governments of the world with their printing presses. So just as someone might chip in a nickel to someone raising donations for his plan to hand out copies of What Has Government Done to Our Money?, by the same token, the early adopters of Bitcoin were doing it for ideological reasons, not for pecuniary reasons. Then, once Bitcoin got off the ground because of such motivations, people had a framework for evaluating its purchasing power, and then it was off to the races in terms of standard Misesian theory.

Note that I’m not even saying that the above reconciliation is my preferred way to handle the situation; I would need to think about it. I think an important piece of the puzzle here is that in the very early days, Bitcoin was practically free. In other words, it had an extremely low market value. So I’m open to the idea that there actually is a loophole in Mises’ categorical statements, since someone might acquire something as a medium of exchange at a very low price just on the off chance that it might take off. As a general rule, this would be an odd policy; nobody would even expend the labor effort to pick up a stone in the forest, on the off chance that stones of that size and composition would one day become the global money.

In my view, Murphy is essentially correct here. However, I think there is a less roundabout (pun intended) manner to understand how Bitcoin has become a medium of exchange (with the difference, between medium of exchange and money, noted).  In the quote by Murphy of the page 423 Mises, it is important to note that Mises uses the term "economic good" rather than commodity. Thus, Mises in his definition has correctly gone beyond the idea that a medium of exchange has to be a raw commodity. It simply has to be an "economic good." And what is an economic good? It is anything valued. It is so regardless of price, high or low, when exchanged.

Thus, the minute anyone was willing to purchase a bitcoin, for any reason, it was clearly an economic good. Thus, the key in my view is not that bitcoins were "practically free," but rather that they were being exchanged non-free, but for money, which established them as an economic good. Remember, economics is a science that studies valuation and exchange, but what individuals value is a given to the economist. If individuals are purchasing any item, it is by definition an economic good, no need is required to understand why the good is being valued and purchased, by the economist qua economist.

Once it is understood that something is an economic good, it falls nicely into its potential to become a medium of exchange via Mises' regression theorem. Though, it does not mean that most economic goods  will become mediums of exchange.


  1. The first bitcoin transaction for a real good was, I believe, for a pizza. At the current rate of exchange it has turned out to be a million dollar pizza. No matter, a pizza is an economic good, subjectively, to those who purchased it with bitcoins, and the bitcoins were an economic good to those who accepted them in exchange. Regression theorem satisfied!

  2. How great to read some reasonable thought out dialog on a topic. Something to help me think through a topic. Instead of a bunch of high school food fight name calling.

  3. There seems to be a lot of sloppy thinking here. Everybody needs to--as Bob Murphy admits--"think about it" a little straighter.

    First, you gotta get your praxeological definitions straight:

    1. A "good" is a means to a subjective end or purpose of an individual.

    2. Commodities may be valued by individuals for their direct use value or their exchange value.

    3. Goods are commodities valued by individuals for direct use. Individuals consume goods in order to achieve subjective ends.

    4. Monetary commodities are not valued for direct use. They are valued purely for exchange.

    5. Mises regression theorem says that a commodity must begin from a condition of being valued 100% as a means for directly achieving ends before it will ever evolve into a commodity that individuals value purely for exchange.

    Bitcoin seems to violate the theorem. But when you "think about it", they always say that one of the "ends" that pre-monetary gold directly serviced was "ornamentation". Well, hell just about anything that's at all scarce is likely to be valued as a good by all those people on those dumpster diving TV shows to satisfy their "ornamentation" desires--including bitcoins.

    So, I think bitcoin should do more to make us stop and re-evaluate our understanding of the money regression theorem with respect to gold. If 99% of the pre-monetary gold in direct use was for ornamental statues of Baal and only 1% was for soup bowls, then how different is that from bitcoins evolution?