Human Action (Mises)Now the extent of that part of the demand for a medium of exchange which is displayed on account of its service as a medium of exchange depends on its value in exchange. This fact raises difficulties which many economists considered insoluble so that they abstained from following farther along this line of reasoning. It is illogical, they said, to explain the purchasing power of money by reference o the demand for money, and the demand for money by reference to its purchasing power.

The difficulty is, however, merely apparent. The purchasing power which we explain by referring to the extent of specific demand is not the same purchasing power the height of which determines this specific demand. The problem is to conceive the determination of the purchasing power of the immediate future, of the impending moment. For the solution of this problem we refer to the purchasing power of the immediate past, of the moment just passed. These are two distinct magnitudes.

— Ludwig von Mises, Human Action (Auburn: Ludwig von Mises Institute, 1998), pp. 405–406.

Many people interpret Mises’ regression theorem as claiming that all money must have some value as a non-monetary commodity. This is only true for the first currencies. It’s possible for a new currency, such as bitcoin, to be first introduced as a substitute to an already circulating currency (e.g. the U.S. dollar), therefore basing its purchasing power on that of the dollar (by setting an exchange rate and basing prices on U.S. dollar prices [or Euro, et cetera, prices]). From there, bitcoin can go its own direction and become a competitor, rather than a substitute. An accurate reading of Mises — at least, in my opinion — suggests that bitcoin doesn’t violate the regression theorem any more than the occurrence of fiat money does (which first arose as a substitute to outside money and then went its own direction).

Where initial substitution isn’t possible, a potential currency must have some use value. As a commodity is more widely traded, its purchasing power can be partially decided by this use value. That is, as the first monies spontaneously emerge, money prices will have to initially be based on the value these commodities carry as producers’ or consumers’ goods, and then a liquidity premium is added as the commodity circulates more widely. These are currencies that can’t base their purchasing power on already existent currencies, by initially acting as substitutes.

If you’re still having trouble explaining bitcoin, think of the U.S. dollar, backed by whatever assets the Federal Reserve owns. From where did the U.S. dollar derive its value? Some say from taxes. The problem is that taxes are monetary transactions, and it represents the U.S.’ demand for money. But, for the U.S. government to know how much it should tax, it needs to have some basis to calculate its demand for money — without money prices it can’t do this. Instead, the U.S. dollar — say, after 1971 — based its purchasing power on the already existent dollar when it was still redeemable, which in turn continued to base its value on prices of the recent past. We can trace this back to the national banking era, where the U.S dollar was first introduced as an alternative substitute for outside money. Bitcoin has essentially the same history, except that it’s a step beyond fiat money, in that it originally used (if it still doesn’t) fiat money as a means of estimating its initial purchasing power.

The vehement rejections of bitcoin based on the regression theorem are all misreadings of the latter. Of course, this doesn’t mean the bitcoin is preferable to alternatives as a general means of exchange. I’ll continue to use the U.S. dollar for the foreseeable future, because it’s less volatile and less sensitive to speculation. But, the regression thereom is not an adequate basis for a critique of bitcoin.

8 thoughts on “Regressions

      1. Seth MacLeod

        In the regression theorem, Mises argues that there are certain necessary conditions for a good to become a medium of exchange. It seems as if both Bitcoin supporters and detractors are focusing on these conditions to such an extent that they are acting as if Mises wrote a step by step manual as to how a specific good progresses to money.

        Whether gold, silver, platinum, tobacco, or Bitcoin becomes money is a thymological matter, not a praxeological matter. Anything can become money should enough people value something in the relevant way that Mises outlined. If platinum isn’t good as money because it looks too much like silver, that is not a praxeological matter. If Bitcoin has use as transferring money discretely through the internet, that is not a praxeological matter.

        Bitcoin’s problems are not praxeological, and it is not clear that whatever few strengths it does have outweigh its many weaknesses. Conceivably, everyone in America could burn all their cash tomorrow morning and decide to use a barter system. There is nothing in praxeology that contradicts this. It *could* happen. But we know from experience that this is an absurd scenario.

        Digital currencies are the same. There is nothing in praxeology that contradicts their possibility, but we know from thymology that it is absurd that they could ever gain real traction as money.

  1. Silvano IHC

    Recently I downsized a little the importance of the regression theorem. For sure, prices don’t appear out of the blue, but referring back to a time when money value resolves itself into commodity value simply surrenders the attempt to explain the determinant of the present value of money. Logical explaination goes side by side with historical reconstruction. B.M. Anderson argued that:

    “A historical regressus will not, of course, fit in any logical manner with a synthetic theory which tries to construct an existing situation out of existing elements… Existing social forces have their history. But, in a given moment, they are what they are, and what they were at a different time adds no ounce of weight to the power they now exert. […] The historical account is one thing; the cross section analysis is another.”

    When speaking of goods Mises abandons the historical regression: “No causal relation obtains between the prices of the past and of the present in so far as the mutual exchange relations of economic goods (with the exception of money) is concerned.”. Well, but if money and goods are both subject to the marginal utility analysis why does one involve “dark ages” and the other not?

    Last but not least, as Schumpeter remarked, it’s possible that the essence of things reveals itself throughout the curse of history, so the later manifestation of a phenomenon are also the simplest and the purest.

  2. JCatalan

    @google-e02c99baee9fa24c38d43d1ad7d71fc1:disqus : I mostly agree with you. The only thing is that I think there are certain commentators trying to make a praxeological argument against bitcoin, and I think they’re getting it wrong. They might be mixing up thymology and praxeology, as you suggest (they don’t distinguish between competing currencies which are introduced at different points throughout the evolution of money in general).

    @twitter-306777099:disqus : There is an important difference between consumers’ goods and the medium of exchange. In the case of the former, once these discrete goods exist, their value is based on some relationship between the ends of the individual and the properties of the good (and the fact that the individual recognizes these properties and can take advantage of them in a useful way). The property of money that gives it value is its liquidity, but a liquid commodity doesn’t just randomly come into existence. First, a commodity has to become widely traded, and then it will begin to be valued for its growing liquidity. Mises focuses on how this process unfolded, arguing that as commodities gained liquidity initial money prices were based on the values established in barter.

    1. Seth MacLeod

      @JCatalan:disqus Right, these people are bringing praxeology into a discussion where it doesn’t belong. Motivations are outside the scope of praxeology. If people are trading bitcoins, then we know that at least two people value it for whatever reason. Claiming that they don’t have value or intrinsic value is absurd from a praxeological perspective because clearly there are people who do value them and are acting on those values. From a praxeological perspective, it doesn’t matter why they value them; what matters is that they do value them.

      We can examine why something would make a good money (or not) from a thymological perspective. In the case of bitcoin, it has very little use for most people. Even if bitcoins can be used to make transactions anonymously, most people just don’t care about that. Nothing is perfectly anonymous, and most cash transactions are anonymous enough if that is the sort of thing people care for. If anonymous transactions were something that people in general value, then perhaps bitcoin would have a chance, except that it then faces the problem of digital currencies being nonscarce. If bitcoins were truly valued by the general population, there wouldn’t be enough satoshis to go around; bitcoin would be too valuable to be traded and a new digital currency would have to be created to keep up with demand. And that is a preposterous scenario as people just don’t care about that sort of thing.

      td;dr: The fact that there are some people who value bitcoins should be the end of the discussion in terms of praxeology. Whether or not people in general would value bitcoins is a discussion for thymology.

    2. Silvano IHC

      Yes, but even if the first kind of money were stuff (and, to be fair, that is a little bit disputed), it doesn’t mean that stuff are money. It was just a kind of technology which allow to settle payments.Monetary innovation is (mostly) a by product of international trade.
      Anyhow this is not the main point:the main task is to include money into a marginalist framework avoiding the Austrian circle. And we can’t say that an institution emerges just because it’s useful. Institutional innovation is expensive and under imperfect knowledge and transaction costs can’t be a priori defined. So it’s even plausible that money is the unit of account to exchange geographically and intertemporally the social product, while commodity-money was just its first (?) technology.

      1. JCatalan

        Yea, that the first monies were once non-monetary commodities doesn’t mean that all non-monetary commodities will become money. The point, though, is that for something to be called money it has to have a certain amount of liquidity, and this liquidity could have only been developed over time. The regression theorem speaks to this, but puts it in terms of price formation. Basically, how did we know where to set money prices when money first came about? Well, we based them on the “prices” commanded by the relevant commodity in the preceding barter economy.


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