Topic: Mises regression theorem is inconsistent (Read 9401 times)

Hello, what I exactly claim  is that regression theorem is not necessary to explain why the market grants value to any medium of exchange.  It would be like saying that any economic good needs to have a previous utility to actually have any utility!.  

Regression theorem is not only unnecessary to explain bitcoin´s value.  It´s also unnecessary to explane commodity money´s value or fiat currency´s value.     A commodity which is seem as useless today, could be subject to a newly discovered utility as a medium of exchange and then become valuable just for this new and unique utility.

What Carlos Bondone claims (and I agree) is that Monetary utility is valuable enough by itself.  The real problem for Mises is that since his monetary theory does not separate the concepts medium of exchange (currrency) and money he couldn´t accept that the market may grant value to a medium of exchange which is not a present good (i.e. money), but the fact is that the market uses credit (which of course is not a present good) as medium of exchange, and the market is perfectly capable by itself to calculate the value of credit.

Maneulgar,  this is a really interesting point.  I'm not sure I can disagree with you at this point.  I want to think and read about this for a while and then will post my thoughts back on here.  It would have been impossible for Mises to predict the emergence of a scare money source out of non-scarce items (bitcoins which are based on electrons, or digital ones and zeros) so does his Regression Theorem fail?  Food for thought. 

Careful, Menger said that usually, all commodities that became money throughout history had a non-monetary use before becoming money.  It is was just an historical observation, but he did not establish that as a necessary precondition for money.   Only Mises, with his regression theorem, established it as a necessary precondition.


As I said from the beginning, I don´t think it´s mandatory for anything to become money to have a prior non-monetary use.  Besides, having a non-monetary use does not guarantee that the good is not demonetized in the future and probably lose most of its value.  Nevertheless, having more than one utility is a nice property, which will make that new money more valuable and stable.   Namecoins would fullfill the regression theorem for sure.  I agree with you.

I was thinking today that even if the goldbugs are right about Bitcoin, then surely Namecoin (or perhaps something more mature) can emerge as a successful currency and fill the same role. Because if the criticism of Bitcoin is right (i.e. that unlike gold, you can't do anything with a bitcoin), and this inevitably means that its value will fizzle out over time and that there will always be a bagholder left at the end (which I don't necessarily accept), then Namecoin doesn't suffer from this problem. The argument is that because gold and silver can always be used in electronic equipment and other industries, it will always have some demand in the economy, so there's never a bagholder. A red herring I suspect, but oh hum... they might be right. At the very least Bitcoin will be a nice empirical test of that, because it effectively controls for the centralized nature of other fiduciary currencies (I won't call Bitcoin a fiat currency, because that term relates to the force of government).

The argument from the Mises' Regression Theorem and Menger goes that a money good must have demand for some non-monetary utility, at least initially in history, in order to even become money. Then it will be used in barter trades and the very first prices will be set. From then on, it is only the most divisible, fungible, etc, goods that are being traded that will emerge to become de-facto standard currencies. People will accept gold as payment because they know it stores value well, and they can always sell it on (i.e. purchase other goods with it, and divide it up for change if necessary) because there is always some demand for it in the economy, because somewhere down the line it has non-monetary utility for someone.

But if money naturally emerges from a state of barter between goods that provide utility, then Namecoin can work as a currency by this logic. Namecoins are identical to bitcoins in the way that the are mined, and in the way transactions occur, but you can do something with a namecoin: register and hold a .bit domain name. This is like land in the sense that no two people can own the same parcel of land, and no two people can own google.com, but it has utility. You enjoy a monopoly over the land you own, and over the domains you own. They are especially useful to poker sites and bittorrent sites, who could potentially have their domain names seized by the government (because they have control over the root DNS servers), but they will be safe with a .bit name. The only person who can control it is the one who owns the private key for the namecoin, which will be stored and backed up somewhere in Sweden or something, where the US government has no jurisdiction to launch a raid even if came down to that.

So if they're right, Bitcoin will eventually die (once all the hype settles down), but Namecoin could potentially live on because it does provide non-monetary utility. I think it satisfies what these guys want to see in a currency. Because of this, it could eventually emerge as a competing currency in the same way that gold is purported to have arisen as money: naturally and spontaneously. It could fill the role of Bitcoin, even if Bitcoin can't. So who cares? Any way you shake it, distributed peer-to-peer cryptocurrencies could very well be revolutionary

Just a thought.

(watching -- sorry for the noise)

This is just enough for any agent to give something in exchange for Bitcoins. How much? whatever that agent is willing to give on exchange is a valid market price.  Once that first voluntary exchange is performed, you have your first market price for Bitcoins.

Need for any prior non monetary use? Absolutely not.

The point is, how many fiat currencies have been tried to impose, and therefore setting their value by decree, that have failed completely from the beginning?

The point is that whenever issuers have tried to impose a fiat currency, they looked extremely careful to the market, because they know that they cannot defeat the market (they would like to, but they know they can´t, it´s too expensive).  First they sound out the market to retrieve a reasonable market price, and then they publish that price.  Are they setting the price or is the market? Of course they will pretend that they did set the price and all their propaganda will say so, but that´s just propaganda, not real facts.

And yes, monetary theory since Mises is not correct (Hayek did honestly acknowlege this).  In my opinion only the monetary  principles of Carl Menger (the founder of the austrian school) and more recently Carlos Bondone  are correct.

If you need a prior price to excahange anything, then nothing could have ever became exchangable for the first time.  Because this has happened all time through history whenever an utilitiy was first discovered for a good.  

The utility of medium of exchange is valuable enough by itself, no need of any previous utility.    Wouldn´t you like to buy something that you suspect that its single utility is to become a generally accepted medium of exchange before everyone else realise it? I would, and I would pay just for that.

Wrote a very long answer to this that got lost. Anyway a summary. I don't think this is a complete explanation. Monetary utility comes from exchangability. People exchange there goods for money because money have a higher marginal utility being highly exchangable. BitCoin in its very early stage did not meet this criteria, you couldn't buy much of anything with it, also the regression theorem is there to explain where this monetary utility of money comes from in the first place. It states that you should be able to trace the value of money back something value when it was not a medium of exchange.

I really wouldn't call BitCoin in its very early stage a medium of exchange. Maybe a expected future medium of exchange. I think the initial value came from hopes of increased privacy and just plain nerdy fun. The value was minuscule at the time but that doesn't matter and this would satisfy the basics of the regression theorem.
Mises explination of it does however need some work for it to explain BitCoin properly but that is besides the point the theorem holds...

Yes, everything does comply with the regression theorem or it would not exist. That is what regression is...


No, I doubt that is why he developed it. The regression theorem explains the emergence of fiat and credit currencies also, or the theorem would be invalidated and useless to make any point.

Since it does apply to every currency that does and ever existed and thus is not invalid it is however useful to explain that the origin of money has to happen in a free environment and that you can not create money by decree without pegging it to something the free-market already established a comparable price on.

Since no one was forced to use BitCoin at a pegged value to something else at gunpoint it must have regression or it would not have value or prove the regression theorem wrong. But it can't prove it wrong because the regression theorem is based on a set of very simple a priori truths.

If it is can actually be disproven by a post priori fact Austrians have far bigger problems then the regression theorem being invalidated. The entire methodology and basic principles of Austrian economics would have be thrown out...

I don't think I can improve much on the explanations on how BitCoin regresses given here already by me and others. They are good enough for me not to throw out Austrian economics and I think I will leave it at that...

It is very much economics. There are material resources involved getting distributed between humans by human action. Having fun is a perfectly valid economic reason for a choice of how to use resources. To not be economics it would have to be 100% immaterial or completely internal to one individual. BitCoin uses plenty of material resources from the general market. Someone buys electricity and computers and network infrastructure from someone to have fun with BitCoin, it is economic activity.

Actually I would say that the ultimate goal of all economic activity is to have fun. Having fun or increasing the capacity for future fun thru collaboration and material factors is what economists mean when they speak of utility or a good...

What the regression theorem says is that for a commodity to become money, it needs a prior non monetary use.  It´s not about historical prices because since the very first moment that a good has an utiltiy and therefore is exchanged, then it has a price.

The issue here is that bitcoins are first exchanged and consequently they have a price because they are seen as useful.  And they are useful because of its monetary utility.  There is no need to find any other prior utility, and besides they do not have any other.

The first time a price is set for something is a normal market task.  Whenever anything is subject to have any utility (no matter if it is monetary or not) then the market will begin to work to set a price for it.  This has happened to all economic goods in history.

That's because the $20 bill isn't worth $20, it represents $20.  Don't confuse the symbol for the thing with the thing.  People value the symbol at $20, but the physical representation of the thing, when destroyed, is no longer distinguishable as the symbol.

Actually, it would not be in economics, but rather praxeology, the general science of human action, of which economics is simply a subset of action.

Pre-existing demand is necessary for a good to become a medium of exchange, and this demand had to have existed because otherwise no one would be trading electricity for mining coins. I think that theoretically, demand by one person is enough for a medium of exchange to be created. If 0 people demanded coins, then 0 people would have mined them initially. All it takes is one miner to change that. Unfortunately, the Austrian School disagrees. Well, this one guy does, anyway: http://www.lewrockwell.com/blog/lewrw/archives/89471.html

There is still need for a regression theorem to explain how bitcoin became (or potentially will become if you don't think it is) money. Without the regression theorem, you have no explanation of the current $30 prices on Mt gox. The regression theorem explains to us that "exchange value" of any commodity or money, need to have a historical reference of past prices. No one would buy a $30 bitcoin if they hadn't seen what others were prepared to pay for them.

In austrian theory it is. If it's a part of human action, it's economics.

Very well thought out.  Thanks for the link!

http://forum.bitcoin.org/?topic=583.0

Previous topic on this idea. User "xc" has an excellent anlaysis on the subject.

Processing power is an input for BitCoins, it is a necessary element for creating them, not a previous use.

Information (bits) and processing power of course have many other economic uses.  But if you use them to create BitCoins which you are owning just for fun or hobby with no intention of economic exchange, there is nothing economic about it.

subscribed