Bitcoin and Mises´s Regression Theorem (II)
This is a short update of a previous post about Mises´s Regression Theorem. Mises wrote the following on his Theory of Money and Credit (chapter 8 ):
“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”
The bolded part of the paragraph is critical for the consistency of his Regression theorem. It is not sustainable theoretically to require that a good must have a previous utility before becoming money and at the same time stating that this condition does not have to remain.
He also wrote in Human Action (Chapter 17 section 4 — “The determination of purchasing power of money”):
“Neither a buyer nor a seller could judge the value of a monetary unit if he had no information about its exchange value–its purchasing power–in the immediate past.”
Then, how can a buyer or a seller be capabale to judge the value of any good if he had no information of its exchange value –its purchasing power– in the inmediate past? Why is the utility as a medium of exchange so special that the market is unable to assess it at all?
The market is perfectly capable of discovering any good’s value based on its utility, including monetary utility. Regression Theorem is supposed to solve a circularity in the sense that people grant value to a good as a medium of exchange because of its purchasing power. But currency does not have value because of its purchasing power — all economic goods have purchasing power–, but because of its monetary utility (scarcity, divisibility, difficult to fake, etc.) that makes it suitable as a medium of exchange.
If the following statment is inconsistent: Bread is useful as food because is valuable as food.
So is this one: Currency X is useful as a medium of exchange because it has value.
The fact is that all economic goods have value because of its utility:
- Bread has value because it is useful as food.
- Currency has value because it is useful as a medium of exchange.
Manuel Polavieja
Originally published at eleconomistaprudente.wordpress.com on June 25, 2011.