Bitcoin and mises regression theorem
There is a large misconception among Austrian school advocates that Bitcoin somehow contradicts a supposed theorem by Mises nicknamed Mises Regression Theorem. Let’s not delve on the point that nowhere in Mises’ The Theory of money and credit can you even find the word regression. What the supporters of this argument say is the following:
Mises claims that a commodity can’t start as a medium of exchange. In order to establish itself as a medium of exchange, there first needs to be an exchange of this commodity. Thus, to be valuable, bitcoin needs to have some value outside of it being a medium of exchange. Gold has such value — it can serve as Jewellery and in different industries. Bitcoin doesn’t, so it has no value.
To say this has nothing with what Mises actually wrote is an understatement.
The argument Mises suggested does indeed say that to become a medium of exchange, a commodity must at some point in time have an exchange-value, based on which people will trade on it in the future until it becomes money. First, let’s agree Bitcoin is a commodity -
“We may give the name of commodity money to that sort of money that is at the same time a commercial commodity; and that of fiat money to money that comprises things with a special legal qualification. A third category may be called credit money, this being that sort of money which constitutes a claim against any physical or legal person”
Surely Bitcoin is not fiat money — it’s not a legal tender of any state or government. It’s not credit money — it doesn’t constitute a claim against any physical or legal person. We thus arrive to the understanding that it’s a commodity — but does it have any value ?
“Before an economic good begins to function as money it must already possess exchange-value based on some other cause than its monetary function. But money that already functions as such may remain valuable even when the original source of its exchange-value has ceased to exist. Its value then is based entirely on its function as common medium of exchange”
It’s a famous anecdote that the first bitcoin exchange-value was 10000 bitcoins for two Papa Joe’s pizzas. Once this exchange-value was established, Mises says clearly nothing matters anymore. The Subjective value of 10000 bitcoin to the guy owning two pizzas was greater than the two pizzas, and so he established an exchange-value. From this point onwards, all that matters for the valuation of bitcoin is the series of exchange-values. That’s it. That’s why the Austrians believe in subjective value — it doesn’t matter if the first transaction made sense. Was the guy exchanging 2 pizzas for 10000 bitcoin gullible ? Maybe, but the fact was that in his subjective valuation the deal was worth it is enough to establish an exchange-value, which is all Mises “Regression theorem” requires.
But what about Gold ? Isn’t Gold better than bitcoin because it has real commodity use, and can serve as Jewellery and in the chip industry ?
I would say that:
Serving as Jewellry is not commodity use — It stems from the same source as being a widely accepted medium of exchange. If at some point people wouldn’t want it as a medium of exchange, they wouldn’t want it as Jewellery just as well. Quoting Szabo on this one, “‘Jewelry is money’ is how Sebag summarizes his observations of the modern Asian jewelry market.”. And Mises: “One and the same piece of metal can even fulfil both purposes simultaneously, as will be seen if we think of ornaments that are used as money or of a coin that is worn by its owner as jewellery until he parts with it again”.
https://medium.com/@yotamyachmoorgafni/when-mises-met-szabo-b7907d16f9d9
