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Author Topic: Mises regression theorem is inconsistent  (Read 8752 times)
manuelgar
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June 05, 2011, 11:05:04 PM
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Hello,

I´ve been thinking a lot about this.  I think I know very well the regression theorem of money from Mises and certainly BitCoins violate this theorem.

The issue here is that I don´t think that the regression theorem of money is necessary to explain why currencies come to existence.   It´s not true that currencies need previous industrial utility to become currencies.     Credit has been used as currency for a long time and it has no industrial utility.

I´ve written a brief post about this on my blog, please visit if you are interested.

http://eleconomistaprudente.wordpress.com/2011/06/06/bitcoins-and-mises%C2%B4s-regression-theorem/

P.D.  Nevertheless, it wouldn´t hurt at all for BitCoins to have a non-monetary use.  Maybe some cryptographic application as unique tokens?
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rahl
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June 06, 2011, 10:31:29 AM
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No don't think it violate the Mises regression theorem, it is just that it evolved incredibly fast so the first stages where barely noticeable.

BitCoin was not actually created as a money, but a scarce virtual good that can be owned anonymously. The first transactions with BitCoin would have been barter and not indirect exchanges. People mined some coin and used it to barter to something else, and only gradually there are more and more indirect exchanges where BitCoin is a money taking place.

The fact that a owner of a unit of BitCoin good can not be directly identified and that it is virtual add tremendous utility value to BitCoin. Also a bit of the initial value can be derived from the nuseanse and cost of creating it. Mises theorem is simply and understandably just not adapted to a virtual economy so it is difficult to see, but there is utility value in BitCoin that is not purely monetary. It don't think Mises ever claimed something first have to be used in heavy industry, gold didn't have any industrial value before it was used as money. It was just pretty to make ornaments from and scarce. With BitCoin instead of wanting shiny things to give the money initial value people wanted something which is virtual and who's owner is very difficult to identify...

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June 06, 2011, 10:36:13 AM
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No don't think it violate the Mises regression theorem, it is just that it evolved incredibly fast so the first stages where barely noticeable.

BitCoin was not actually created as a money, but a scarce virtual good that can be owned anonymously. The first transactions with BitCoin would have been barter and not indirect exchanges. People mined some coin and used it to barter to something else, and only gradually there are more and more indirect exchanges where BitCoin is a money taking place.

The fact that a owner of a unit of BitCoin good can not be directly identified and that it is virtual add tremendous utility value to BitCoin. Also a bit of the initial value can be derived from the nuseanse and cost of creating it. Mises theorem is simply and understandably just not adapted to a virtual economy so it is difficult to see, but there is utility value in BitCoin that is not purely monetary. It don't think Mises ever claimed something first have to be used in heavy industry, gold didn't have any industrial value before it was used as money. It was just pretty to make ornaments from and scarce. With BitCoin instead of wanting shiny things to give the money initial value people wanted something which is virtual and who's owner is very difficult to identify...

Cost does not create value. Cost is paid because value is expected.

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rahl
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June 06, 2011, 10:38:51 AM
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Cost does not create value. Cost is paid because value is expected.

Yes, but anchoring BC in scarce physical goods like energy and processors did create scarcity and a frame of reference (ie everyone knows there own price in other stuff for the cost they paid for them and it can set a lower limit anyone will be willing to do the initial barter at).

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June 06, 2011, 10:40:06 AM
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There is a place where this has been discused already: http://forum.bitcoin.org/?topic=583.0

Dont start new threads, use the old one.
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June 06, 2011, 10:57:55 AM
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Cost does not create value. Cost is paid because value is expected.

Yes, but anchoring BC in scarce physical goods like energy and processors did create scarcity and a frame of reference (ie everyone knows there own price in other stuff for the cost they paid for them and it can set a lower limit anyone will be willing to do the initial barter at).

That is just wrong. The ashes of a $20 bill don't have $20 as a lower limit to value.

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marcus_of_augustus
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June 06, 2011, 11:11:21 AM
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Interesting ideas being floated here, just going to follow this thread.

rahl
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June 06, 2011, 11:33:27 AM
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That is just wrong. The ashes of a $20 bill don't have $20 as a lower limit to value.

Please that is not what I am saying at all. "frame of reference", "can", "initial" ... maybe you missed reading all of those words. It helps a lot to know what shit that has no market price did cost you when you are trying to figure out what to sell it for it is pretty obvious...

And yes some people will have a much higher expectation of future value, some will be happy getting there cost back and some just want get rid of it for anything they can get. Bit cost does have an effect on where the initial bidding can start.

manuelgar
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June 06, 2011, 10:40:35 PM
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There is a place where this has been discused already: http://forum.bitcoin.org/?topic=583.0

Dont start new threads, use the old one.

Sorry, I first tried to use the old thread, but the system suggested me to start a new one because the old one had been quiet for a while.
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June 06, 2011, 10:55:02 PM
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great to get these links to old interesting forum posts. I'm a relative noob so haven't seen many of them.
(off topic - but this shows the limitations of forum infrastructure. The collective memory is being diluted. Probably as many new members in the last 2 months as there has been in the previous 2 years.)
manuelgar
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June 06, 2011, 10:58:39 PM
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No don't think it violate the Mises regression theorem, it is just that it evolved incredibly fast so the first stages where barely noticeable.

BitCoin was not actually created as a money, but a scarce virtual good that can be owned anonymously. The first transactions with BitCoin would have been barter and not indirect exchanges. People mined some coin and used it to barter to something else, and only gradually there are more and more indirect exchanges where BitCoin is a money taking place.

The fact that a owner of a unit of BitCoin good can not be directly identified and that it is virtual add tremendous utility value to BitCoin. Also a bit of the initial value can be derived from the nuseanse and cost of creating it. Mises theorem is simply and understandably just not adapted to a virtual economy so it is difficult to see, but there is utility value in BitCoin that is not purely monetary. It don't think Mises ever claimed something first have to be used in heavy industry, gold didn't have any industrial value before it was used as money. It was just pretty to make ornaments from and scarce. With BitCoin instead of wanting shiny things to give the money initial value people wanted something which is virtual and who's owner is very difficult to identify...

BitCoin was developed as a currency from the begining.  Just look at its name bitcoin, and the paper that originated them "bitcoins: a peer to peer cash system".

Transaction privacy is a monetary utility.   Costs are irrelevant for market value, I could spend lots of energy and work to produce something that nobody wants, so no matter the cost its market value will be 0.  Market values drive costs, not the opposite.

When I talk about Industrial use I mean any non monetary use, which includes ornamental uses. Jewerly is a pretty strong industry.   Gold had been used for ornamental purpose well before it was used as currency.  Mises claims that for a good to became money it needs to have a non monetary prior use, this is what his Regression Theorem is all about.

But I claim that Regression Theorem is not necessary, and it does not work not only with BitCoins, it doesn´t explain well why credit currencies have value.  Carlos Bondone´s monetary theory, which is based on Austrian School founder Carl Menger,proposes a stronger monetary theory, which prefectly explains the BitCoin phenomeon and in regard of this theory BitCoins do qualify as money.
marcus_of_augustus
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June 07, 2011, 01:49:38 AM
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There is network effect of money to consider here also. The fact that bitcoin protocol is P2P may have imbibed it with an inherent potential to be money from the beginning, regardless of the regression theorem. It is a new and interesting line of reasoning.

rahl
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June 07, 2011, 07:59:52 AM
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BitCoin was developed as a currency from the begining.  Just look at its name bitcoin, and the paper that originated them "bitcoins: a peer to peer cash system".

That something is intended to become money does not necessarily mean that it is money.

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Transaction privacy is a monetary utility.   Costs are irrelevant for market value, I could spend lots of energy and work to produce something that nobody wants, so no matter the cost its market value will be 0.  Market values drive costs, not the opposite.

Not it is not. It is payment service utility.
Yes, but you would not place the first sell offer in the market at 0 but probably at your cost or higher unless you where really stupid.

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But I claim that Regression Theorem is not necessary, and it does not work not only with BitCoins, it doesn´t explain well why credit currencies have value.  Carlos Bondone´s monetary theory, which is based on Austrian School founder Carl Menger,proposes a stronger monetary theory, which prefectly explains the BitCoin phenomeon and in regard of this theory BitCoins do qualify as money.

It does explain why credit currencies have value. They are initially issued in promises of X that already have a market price. So there is plenty of regression there with a very strong link to previously established prices. Bitcoin has a very weak link to previous established prices but provides additional payment service utility which has value in itself.

manuelgar
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June 07, 2011, 01:26:47 PM
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BitCoin was developed as a currency from the begining.  Just look at its name bitcoin, and the paper that originated them "bitcoins: a peer to peer cash system".

That something is intended to become money does not necessarily mean that it is money.


Of course, only the market can decide if finally the initial project known as BitCoin becomes money, but the initial objective of the project was to provide an anonymous and decentralized medium of exchange and store of value (i.e. money), or at least I have no knowledge about any other non-monetary objectives.   Anonymous and decentralized are very nice characteristics, but they are specific characteristics that were specifically designed for its purpose as a medium of exchange

Quote
Transaction privacy is a monetary utility.   Costs are irrelevant for market value, I could spend lots of energy and work to produce something that nobody wants, so no matter the cost its market value will be 0.  Market values drive costs, not the opposite.

Not it is not. It is payment service utility.
Yes, but you would not place the first sell offer in the market at 0 but probably at your cost or higher unless you where really stupid.


Payment implies exchange, money is medium of exchange. BitCoin is not VISA (payment service), they are exchanged for goods.  The payment is performed through the delivery of BitCoins in exchange of goods and services.
It doesn´t matter where you place your ask order if it is not filled.  Bid and Ask orders are subjective valuations, price arises from real exchange (executed transactions).


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But I claim that Regression Theorem is not necessary, and it does not work not only with BitCoins, it doesn´t explain well why credit currencies have value.  Carlos Bondone´s monetary theory, which is based on Austrian School founder Carl Menger, proposes a stronger monetary theory, which prefectly explains the BitCoin phenomeon and in regard of this theory BitCoins do qualify as money.


It does explain why credit currencies have value. They are initially issued in promises of X that already have a market price. So there is plenty of regression there with a very strong link to previously established prices. Bitcoin has a very weak link to previous established prices but provides additional payment service utility which has value in itself.

Credit currencies are currencies because of its monetary utilities other than store of value (in fact that´s their weakest utility as currency). The great difference between money and credit currency is that the first is a present good used as currency, and the second is someone else's liability used as currency.
manuelgar
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June 07, 2011, 02:51:38 PM
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There is network effect of money to consider here also. The fact that bitcoin protocol is P2P may have imbibed it with an inherent potential to be money from the beginning, regardless of the regression theorem. It is a new and interesting line of reasoning.

Yes, the network effect and the P2P is very interesting.  The underlying technology is obviously new, but I don´t think it is something new from a monetary point of view.  Except for anonymity, physical gold and silver worked in a very similar way and they are also decentraliced money.
rahl
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June 07, 2011, 09:38:48 PM
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Of course, only the market can decide if finally the initial project known as BitCoin becomes money, but the initial objective of the project was to provide an anonymous and decentralized medium of exchange and store of value (i.e. money), or at least I have no knowledge about any other non-monetary objectives.   Anonymous and decentralized are very nice characteristics, but they are specific characteristics that were specifically designed for its purpose as a medium of exchange

Still the first transactions can be viewed as bartering in a new commodity. That someone wanted to have because of it's unique value that you can enforce your property right in it very easily and without anyone knowing who you are or just because someone was thought it was nerdy fun. Either way it would fullfill the regression theorem.


Quote
Payment implies exchange, money is medium of exchange. BitCoin is not VISA (payment service), they are exchanged for goods.  The payment is performed through the delivery of BitCoins in exchange of goods and services.
It doesn´t matter where you place your ask order if it is not filled.  Bid and Ask orders are subjective valuations, price arises from real exchange (executed transactions).
But the way BitCoins are held and exchanged adds alot of value on top of what would just be expect to get from it as a medium of exchange. This is separate utility built into the system. BitCoins exchangability and the way they are owned and exchanged are different things. Even if you put everyone with bitcoin on an island so they can all still meet eachother easily they probably would not use it if they had to carry it on them and trade face to face, so there is some other value there that makes people want to hold and use it.

Quote
Credit currencies are currencies because of its monetary utilities other than store of value (in fact that´s their weakest utility as currency). The great difference between money and credit currency is that the first is a present good used as currency, and the second is someone else's liability used as currency.

Yes, and when the liability is issued it's value is specified in something else that has a price. It can be fraudulent or debased after but that doesn't matter for the regression theorem since such action will only affect the future price of the credit currency. I still don't see how credit currency has anything to do with invalidating the regression theorem.

rahl
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June 07, 2011, 09:39:13 PM
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Of course, only the market can decide if finally the initial project known as BitCoin becomes money, but the initial objective of the project was to provide an anonymous and decentralized medium of exchange and store of value (i.e. money), or at least I have no knowledge about any other non-monetary objectives.   Anonymous and decentralized are very nice characteristics, but they are specific characteristics that were specifically designed for its purpose as a medium of exchange

Still the first transactions can be viewed as bartering in a new commodity. That someone wanted to have because of it's unique value that you can enforce your property right in it very easily and without anyone knowing who you are or just because someone was thought it was nerdy fun. Either way it would fullfill the regression theorem.


Quote
Payment implies exchange, money is medium of exchange. BitCoin is not VISA (payment service), they are exchanged for goods.  The payment is performed through the delivery of BitCoins in exchange of goods and services.
It doesn´t matter where you place your ask order if it is not filled.  Bid and Ask orders are subjective valuations, price arises from real exchange (executed transactions).
But the way BitCoins are held and exchanged adds alot of value on top of what would just be expect to get from it as a medium of exchange. This is separate utility built into the system. BitCoins exchangability and the way they are owned and exchanged are different things. Even if you put everyone with bitcoin on an island so they can all still meet eachother easily they probably would not use it if they had to carry it on them and trade face to face, so there is some other value there that makes people want to hold and use it.

Quote
Credit currencies are currencies because of its monetary utilities other than store of value (in fact that´s their weakest utility as currency). The great difference between money and credit currency is that the first is a present good used as currency, and the second is someone else's liability used as currency.

Yes, and when the liability is issued it's value is specified in something else that has a price. It can be fraudulent or debased after but that doesn't matter for the regression theorem since such action will only affect the future price of the credit currency thru normal laws of supply and demand. I still don't see how credit currency has anything to do with invalidating the regression theorem.

manuelgar
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June 07, 2011, 10:34:24 PM
 #18

Hello Rahl,

a) You can view the first uses as you wish, but to me all uses you are describing are monetary.  Except owning it for fun, which is a very weak argument.

b) All those characteristics are an improvement in relation with other currencies. I agree. But being better currency does not mean is not currency.

c) Credit currency does not invalidate regression theorem.  It just demonstrates that is not necessary to justify its condition of currency.  If you are interested you can read more on this here: http://www.carlosbondone.com/pdf/Theory_of_Economic_Relativity.pdf pages 112 to 114.

The main difference between credit currencies and money (understood as present good) is that the first one is created while the second one is produced.  Credit can be created on unlimited quantities with minimal effort, as long as there is somebody willing to borrow.   
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June 08, 2011, 12:48:58 AM
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Bitcoin had original value as nerd points. The bigger the number you see in your balance, the better you feel about yourself.
rahl
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June 08, 2011, 01:13:22 AM
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a) You can view the first uses as you wish, but to me all uses you are describing are monetary.  Except owning it for fun, which is a very weak argument.

b) All those characteristics are an improvement in relation with other currencies. I agree. But being better currency does not mean is not currency.

I don't think owning it for fun is a weak argument in this case. There seem to be plenty of people here which are interested enough in the crypto and p2p technologies to participate in the project as a hobby to satisfy there technological interest.

I think the first actual trades of goods in bitcoin did not happen because bitcoin was easy to exchange, or because it was a safe preserver or value. It was very poor in booth of these regards in the beginning. Actually it wasn't even durable, cause a lot of coin was being created in relation to the money base and for those not tech savy enough to understand how the protocol work it is a new and not well tested technology so they probably where not very concerned about durability either.

Where it would have had value is however as an accounting tool. People could trade goods in one place and USD in another and it would be impossible to identify who traded what goods yet the system still keep track of the rewards for sales and transfer them to the USD marketplace. That is not what a currency is for and not a requirement anyone have made on a sound money...

All of this put together means we have regression. It is just not as straightforward as jewelry -> gold -> credit
 
Quote
c) Credit currency does not invalidate regression theorem.  It just demonstrates that is not necessary to justify its condition of currency.  If you are interested you can read more on this here: http://www.carlosbondone.com/pdf/Theory_of_Economic_Relativity.pdf pages 112 to 114.

I am not sure what you mean by not necessary to justify its condition. Try issuing completely unspecified credit notes and an see how many will accept them. It is very much necessary to tie the initial issuing of credit notes to some established price and create regression...

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