The Subjective Theory of Bitcoin
In a recent article on the Mises Institute’s Power and Market blog, Kyle Ward appealed to the subjective theory of value to castigate Peter Schiff for his notorious skepticism of bitcoin:
Schiff is quick to point out that gold has uses outside of being money. It is used in electronics, dentistry, and jewelry, to name a few…. This leads Schiff to claim that bitcoin is unlike gold in that it has no fundamental (or objective) value. His mistake is obvious: there is no such thing as objective value, whether we’re talking about gold or bitcoin. Value is subjective and determined internally by individuals…. Yes, gold can be used to build electronics, but that only has value because consumers subjectively value electronics. (emphasis in the original)
I believe Ward errs in how he relates the subjective theory of value to bitcoin, but his error stems both from an ambiguity in phrases like “objective value” and from an ambivalence in how the founding fathers of Austrian economics themselves considered the relationship between the human agent and the good being valued.
In this article I will argue that the “orthodox” Austrian school position regarding the emergence of sound money from commodities—first proposed by Carl Menger, subsequently developed by Ludwig von Mises, and presumably adopted by Peter Schiff—is the correct one. But I will appeal to a Scholastic notion of the good to defend that view. That notion of the good is also critical to secure the foundation of a sound economic science.
Value vs. Goodness
By focusing solely on the subjective valuation of the consumer to support the legitimacy of bitcoin as potential money, Ward overlooks that not everything is “valuable,” i.e., suitable for valuation by a human actor.
To see this, let us start by noting that before he introduced the subjective theory of value in his Principles of Economics, Carl Menger was careful to first develop a theory of the good in the beginning chapters of the text. Those chapters indicate that the proper object of valuation is “a good,” and that not everything that is—i.e., not every “being”—qualifies as a good.
Valuation does not turn things into “goods.” Valuation is an assignment of importance (or ranking) of one good relative to another, but that assignment must be applied to proper objects of valuation, i.e., to things which are goods to begin with.
In other words, it is true that there is no “objective value” in things, since valuation is subjective. On the other hand, there is such a thing as “objective goodness.”
But what, then, makes a thing be an objective good?
Menger proposed a definition that includes 4 necessary conditions: a good is that which (1) is capable of causing the satisfaction of (2) an existing human need, and this causal capability has to (3) be recognized by a human agent who is able to (4) turn it into an effect, i.e., bring about the satisfaction of the need.
As it turned out, Menger’s conception of the good was overly restrictive. For example, he denied that charms, folk medicines, divining rods, love potions, and other such things could have the status of goods, judging them to be “incapable of actually satisfying the needs they are supposed to serve” (p.53).
More importantly from the standpoint of the causal realism he aimed to be faithful to, Menger’s theory of the good was ambiguous. By demanding that a causal connection to the satisfaction of a need be recognized by the human agent in order for the thing to be a good, Menger placed the goodness of the thing in the relationship between the mind of the human agent and the thing itself (p.52, fn 4).
Menger’s ideas about the good would later be criticized by Mises who, having no strong commitment to realism, declined to place any objective restriction on what could or could not constitute a good. In turn, however, Mises’ ambivalence about realism would set him up for attacks, notably by the positivists who found that his axiom of human action was scientifically meaningless: to say that human beings act purposely in choosing to employ means (goods) in order to satisfy wants is a stipulation or a tautology. According to the positivists, the only objective datum is the action that can be empirically observed. Nothing can be inferred about an alleged teleological choice made by an actor. To argue for the objectivity of purposeful action is “the psychology of a cult,” as Paul Krugman put it a few years ago.
The criticism of the positivists would be addressed by Hans Hermann Hoppe who, in his Economic Science and the Austrian Method, proposed that the category of action itself provides a foothold into reality and avoids the charge of tautology. More recently, the axiom of human action was defended at the Austrian Economics Research Conference by Professor Douglas Rasmussen who employed Aristotelian-Thomist arguments to fulfill Murray Rothbard’s wish that economic science be established on a solid realist foundation.
Indeed, it seems to me that the strongest foundation for Austrian economics has to be an uncompromising realism. The medieval Scholastics offer such a foundation by showing that the good toward which human action is directed is squarely set apart from the mind of the agent. I will now present some aspects of this notion of the good, albeit without its complete philosophical justification.
Real Goods vs. Logical Beings
Building carefully on the metaphysical realism of Aristotle, the Scholastics have demonstrated that the good is a transcendental property of all “real beings” (entia realia), i.e., beings whose principle of existence is extra-mental. Real beings are things that do not depend on an intellect or mind for their existence.
Real beings include human beings, animals, plants, amoebas, minerals and gases, but also artifacts, like cars and computers. Parts of real beings as well as non-physical properties flowing from the nature of real beings (such as health, for living organisms) are also real beings.
Entia realia are all capable of eliciting a desire in another and hence can be called good. That desire, in turn, may provoke a movement in the subject toward the good. The real being eliciting a desire in the subject may either be desired for itself (for example, an apple to be consumed) or be desired as a means to an ulterior end (for example, a tractor). In either case, the desire rests in the good or, to use the language of economists, the want is satisfied in the good.
Of course, this is not meant to imply that all real things actually elicit a desire in all men at all times. That desire may be latent. Consider that, at one time, sticky and smelly petroleum pits were probably considered a nuisance by human beings before the function of the black liquid as fuel was discovered. Nevertheless, petroleum was good even before it was recognized as such by a human mind. Its goodness did not and does not depend on the agent deeming it to be good, although we can agree that its function as an economic good coincides with the discovery of its utility and its entrance in the economy of exchange.
Petroleum is good because it is real. Gold, silver, copper—and even sand or mud, for that matter—are also real things, and therefore things with the property of goodness. But whether this piece of silver, or that grain of sand, or this acre of mud in that corner of the planet is presently “valued” by one or more individuals can only be discovered by letting human choice express itself through free action.
Note also that real beings do not need to be proper human goods to be good. Horse manure is good even if we ignore its use as a fertilizer. It is a proper good for some insects and those insects, in turn, are proper goods for birds or other life forms, all of which sustain the ecology, i.e., the reality of which man is a part and in which he thrives.
In contrast to entia realia are “beings of reason,” or entia rationis, also referred to as “logical beings.” Unlike real beings, logical beings depend on a mind conceiving of them as a principle of their existence.
Logical beings include ideas, concepts, and abstractions as such, including mathematical abstractions, linguistic constructions, conventions, certain logical relations between real things, and “negative” beings, such as holes or tunnels (the existence of the hole depends on an intellect conceiving of it as if it were a positive reality, otherwise it is simply the absence of wall or, at most, just air).
Logical beings do not possess the transcendental properties of real beings and do not necessarily have the property of goodness. If a logical being is said to be good it is always in reference to a real good it is connected to.
For example, the Constitution of the United States does not have the property of goodness intrinsically, but it is good because of the real goodness of the civil peace it brings about for the country (provided that is your view of that founding document!).
In other words, logical beings are not desired in themselves the way real beings (“goods”) are. Logical beings cannot satisfy wants. A desiring agent cannot rest his desire in a mind-dependent logical being.
One might object that some real beings are also not desired in themselves but only as means to other goods.That is true in some sense, but even in such cases those intermediate goods do satisfy a want.
Consider the following psychological experiences as supportive evidence: if I wish to have supplies on hand to cook with my barbecue grill, my desire can rest in the bag of charcoal briquettes that I buy even before I have the need or desire to start grilling hot dogs. But my desire cannot rest, say, in a “good idea” that I have concocted about a fine point of philosophy until that idea is either communicated to others to change them or is put to work in some fashion to bring about a change in real things. An idea kept to myself or rejected by others keeps me restless. The satisfaction of a want must rest in reality, i.e., in real goods outside of a human mind.
A Logical Relation
To return to the subject of bitcoin, we should now ask ourselves what kind of beings are cryptocurrencies? Are they real beings, i.e., “goods” properly capable of being valued or, on the contrary, are they mind-dependent entia rationis?
At their most concrete level, cryptocurrencies are electronic configurations of a computer network that, by convention, are put in a relationship with specific individual users of the network. A bitcoin owes its existence to the agreement between network users that the material configuration from which it emerges be given a special meaning, an agreement without which it would be indistinguishable from the myriad possible electronic configurations of the network.
For this reason, a bitcoin is a logical relation, i.e., a type of logical being that does not exist outside the human mind the way an ounce of copper exists in the world regardless of whether or how it is thought about. A bitcoin is not a real being and therefore cannot have the property of being “a good.” A human desire cannot properly “rest” in a bitcoin.
But how, then, can there be a market for bitcoins and why are millions of real individual human beings so eager to acquire them and even hold on to them? The answer is that human beings can easily mistake a logical being for a real one, an error called “reification” (although this modern term has a somewhat different denotation).
A reifying mistake can be benign, as when we speak of the cavity in the tooth as if it were a positive reality. Not only is there no harm in speaking of the cavity as if it were a real thing, but it may even be useful to conceive of it that way (say, to habituate a child to brush his teeth).
At times, however, a reification may be an act of serious deception, and sometimes a self-deception, as when we say “Don’t confuse your desire for reality!”
For the purpose of this discussion, however, the most pertinent example of reificative deception is the widespread use of fiat money over the last 100+ years. For what is fiat money but an ens rationis conceived as if it had the attributes of gold or silver?
A cryptocurrency, then, is an attempt to replace fiat money—a logical being which we imagine to be real—not with a real good, but with another logical being which we also imagine to be real, albeit with a plausible claim that this act of imagination is socially more advantageous.
Attractive as bitcoin may be to evade our dependence on fiat money, we should at least be mindful that it is not a real good but a mind-dependent being, and therefore one at the whims of human minds. This is evident not only in the necessary dependence that bitcoin has on fiat money (after all, the printing press is its raison d’être), but also in the rapid proliferation of copycat currencies that defangs bitcoin’s claim to be a scarce resource.
Sound Science for Sound Money
The foregoing shouldn’t be construed as predicting the imminent downfall of cryptocurrencies nor as denying the possibility that they may actually play a beneficial role in the economy relative to the current monetary system. But it’s important for bitcoin enthusiasm not to get in the way of sound economic science.
In a recent appearance on The Bob Murphy Show, Vijay Boyapati, the author of The Bullish Case for Bitcoin lamented that Austrian economists have not given sufficient interest to cryptocurrencies and echoed the position advanced by Ward regarding the origins of money:
While the Austrians have the correct methodology to understand something like bitcoin, I don’t think that it has been applied properly…. One of the things the Austrians really got caught up on is [the idea that] money really has to start off as a commodity.