Murphy on Bitcoin and the Regression Theorem
Based on how frequently the subject came up with friends and families during the holidays, I have a feeling that the topic of cryptocurrencies will not be going away in 2018.
One question I see frequently raised in online Austrian circles is how Bitcoin and other crypto fit with Mises's regression thereom, and so I wanted to share a great blog post by Bob Murphy in 2014 on this topic to help clarify the subject for any interested readers:
It was necessary for Mises to come up with his regression theorem–which traced the purchasing power of money back to the time at which it was valued as a mere commodity in direct barter–in order to ensure that his application of subjective value theory didn’t set up an infinite regress. Since Mises was ultimately explaining today’s purchasing power of money by reference to observations of its purchasing power yesterday, it seemed that he was merely pushing back the problem one step, but not really explaining the value of money in a logically complete way. Yet Mises pointed out that it was not an infinite regress; once we reached the historical point at which the money good was used in direct exchange, then standard price theory took over and the regress stopped.
So, what relevance does this have to Bitcoin? The short answer: none whatsoever. There is no question that people today have a way of estimating the purchasing power of Bitcoin; they can look up the spot price online. If we object that the current price is largely dependent on yesterday’s price, then we start back with the regress. And where do we stop? In early 2009 when the first Bitcoin transactions were negotiated, including a pizza that sold for 10,000 BTC.
If Austrian economists want to say, “But those people had no basis for saying whether that pizza should have been 100 BTC or 1 million BTC!!” OK fair enough. But they did decide, somehow; those initial transactions provided a frame of reference that guided subsequent transactions involving bitcoins. If you want to argue that this odd origin means that subjective value theory can’t be applied to Bitcoin, OK, then so much the worse for subjective value theory.
People right now are exchanging bitcoins against “real” goods and services, and the sellers intend to use at least some of the acquired bitcoins to obtain other “real” goods and services down the road. There is no question that Bitcoin is currently a medium of exchange, though I would not christen it a money yet.
Some people concede that Bitcoin could exist temporarily, but that it would by its very nature be in a bubble with a fundamental value of zero. OK, but by the same token then, the US dollar has been in the same situation for 43 years, and the only reason this is in peril is that the authorities have been printing more dollars with reckless abandon (something that can’t happen under Bitcoin). So when people say, “Bitcoin will never last as money,” are they conceding that yes it might be the world’s reserve currency for a half century?
In conclusion, Ludwig von Mises’ regression theorem has nothing to say about the empirical question of whether Bitcoin will move beyond a medium of exchange and become a true money. If you think that subjective value theory somehow “proves” that a digital currency can never get off the ground because nobody would have any experience with which to evaluate it, then you are simply wrong; it happened in 2009.