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Thursday, January 16, 2014

Theory of Money and Credit at 101: The Regression Theorem and Bitcoin (Liberty Fund)

Liberty Fund recently published a set of essays concerning Theory of Money and Credit by Ludwig von Mises. Larry White writes the lead essay, with responses and critiques from Jörg Guido Hülsmann, Jeffrey Rogers Hummel, and George Selgin. Each brings unique insights concerning Bitcoin and the regression theorem.

White presents two attempts to describe the emergence of Bitcoin in terms of the regression theorem,
Two responses to the challenge seem possible. One is to say that the historical component posited by the regression theorem is not strictly necessary to explain the purchasing-power expectations people initially formed for Bitcoin. The historical component is important to the initial medium-of-exchange value of a good that did have a market value the previous day as an ordinary commodity, or as a redeemable claim, but it cannot be important to a new medium of exchange that had neither. In such a case purchasing-power expectations must arise entirely from forward-looking speculation. Early adopters who paid positive numbers of dollars (or traded pizzas or devoted CPU time) to acquire Bitcoins did so because they believed that it might attain a higher dollar value in the future. In this account, the value of Bitcoin is basically a bubble, a self-feeding phenomenon unanchored by fundamentals. The trouble with a bubble story, of course, is that is consistent with any price path, and thus gives no explanation for a particular price path. Consistent with the bubble story, some Bitcoin-imitator crypto-currencies have crashed to zero after trying to launch into positive value. 
The other possible response is to preserve the universal applicability of the regression theorem by saying that Bitcoin must have been a useful commodity to some people before it became a medium of exchange. As Murphy (2013b) puts a version of this case, it could be argued that “the very first people to trade for it did so because it provided them withdirect 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.… [T]he early adopters of Bitcoin were doing it for ideological reasons, not for pecuniary reasons.” Then, once it had an observable positive price, “it was off to the races in terms of standard Misesian theory.” This scenario, however, does not deliver what the argument requires, namely, an account of how Bitcoins initially had a positive value apart from their actual or prospective use as medium of exchange. The value at every point in this scenario derives entirely from use or prospective use as a medium of exchange (only such use as a dollar competitor is what might “chafe the governments,” not the existence of untraded digital character strings).


Hülsmann agrees with at least part of the second story,
What is the rock bottom of Bitcoin? Presently it is antistatist ideology. If ever the ideology vanishes, something else will have to take its place. At present, it is not clear what that could be.
Selgin nuances the story,
In short, a clever marketing strategy, including a little strategic sleight-of-hand, can substitute for history in putting a positive sign on the expected value of an otherwise useless potential exchange medium.
And Hummel tackles the fiscal theory of the price level in regard to the regression theorem,
If correct, the FTPL implies that neither fiat nor credit money are true outside money in the sense of being assets only, with no offsetting liability. Instead they are really what current monetary theorists refer to as inside money, with future taxes representing the offsetting liability-side, making them much like shares of stock, whose value depends on an anticipated future income stream. Not only does this conclusion eliminate any real-balance effect that can result from fiat or credit money constituting net wealth (unlike commodity money), but it impinges on the long-standing debate over whether a pure inside-money economy would be feasible. 

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