Mises did not understand Menger (III)

This is a translation from an article published at Instituto Juan de Mariana

The objective of my posts at the Juan de Mariana Institute is to write about Bitcoin from the perspective of freedom. Previously, I have dealt with monetary theory and exchange theory because I consider them crucial to understand Bitcoin.

More specifically, I analyzed how Bitcoin fits in the dominant monetary theory within the Austrian tradition, which is the theory of Ludwig von Mises, and that the truth is, it has a pretty bad fit. Mises’s theory does not explain Bitcoin well; Bitcoin is real, and a theory that doesn’t explain reality is not a good theory.

One of the several problems of Mises’s theory is that it does not pay much attention to the theory of commodities. That is, to the goods that we use as means of exchange but that are not money. A commodity is any good that we produce or acquire not for our own consumption but to obtain other goods in exchange, which in a highly specialized economy tends to be practically all of our production.

For example, a lawyer may every once in a while render services to himself, but most of his services are performed to obtain something in exchange. In other words, his services provided to third parties are for him a means of exchange, a commodity.

I am not going to deny that the popular meaning of commodity does not fit too much with what I say in the above paragraph, because by commodity we usually understand a tangible good that can be consumed. And in fact this is the meaning that Mises uses in his theory.

However, Carl Menger uses a meaning radically opposed to the popular sense, and he has very good reasons for doing so. For Menger a good is a commodity insofar as it only has exchange value for its owner. In other words, the owner has no intention of consuming the thing but exchanging it. And if the current owner or the next one decides to consume the thing, then it would cease to be a commodity.

Therefore, according to this definition used by Menger, it is easy to conclude that money is always a commodity, since the owners do not possess it with the intention of consuming it but with the intention of exchanging it sooner or later. And goods that are only useful as a medium of exchange but cannot be consumed, such as fiat currency or Bitcoin, are commodities in their purest form. A commodity would be also a currency if its marketability is very high, that is, when it is generally accepted for exchanges.

Because Bitcoin is a commodity (or a medium of exchange) but it is not generally accepted, we need a good theory of commodities to be able to explain it. And the most rigorous and accurate in my opinion is Menger’s theory, as he devoted a whole chapter in his Principles of Economics. It is worth noting the following comment by Menger in chapter VII (appendix G):

Like many of his other theories, T.A.H. Schmalz’s doctrine of commodities is also very peculiar. Because of an erroneous conception of the relationship between money and commodities, he confuses commodities with consumption goods in the narrow sense of the term, and therefore arrives at precisely the opposite of the scientific definition of commodity given in the present work.

This quote is directly applicable to Mises, who by commodity understands a consumption good, the opposite of Menger. Moreover, in Mises’s theory, it is not possible that a good has value just because it is solely and exclusively a medium of exchange. For Mises, the good must be a consumption good, or at least it must have a prior historical convertibility relationship, direct or indirect, with a consumption good. Therefore Mises’s theory cannot explain Bitcoin, since Bitcoin is a “pure” medium of exchange since it was invented.

Once humans discovered the concept of a medium of exchange, nothing prevents them to invent something whose only purpose is being a medium of exchange. That is the case of Szabo’s collectibles, fiat currencies or Bitcoin.

Satoshi Nakamoto invented Bitcoin, and he gave his effort and electricity in exchange for bitcoin units. We just need to observe how he baptized his creature: “Bitcoin”, read his whitepaper or his comments in bitcointalk to arrive to the conclusion that he valued those bitcoin units because he considered that they could be demanded as a medium of exchange in the future, and not for any other reason.

It could be said that “could be demanded” is speculative and therefore not real. I think this is irrelevant, because the same could be said about any other new invention, it is not special for goods that only serve as a means of exchange. When someone invents something new, it is always speculative, there is no preivous price and no one can be sure that his new invention is going to be demanded by others. Moreover, this also happens with goods that are not new. How many times merchants have to “eat” their commodities because they cannot sell them?

Human action is always forward looking, speculates about the future and implies more or less uncertainty. Bitcoin could have totally failed like many of its predecessors did. So, of course, it wasn’t exempt from that uncertainty at its conception, nor is it now, no matter how much it is already being used as a commodity.

In conclusion, observing the commodity character of Bitcoin, always according to Menger, allows us to understand and explain it better. There is little point in trying to fit it into the theory of money when it is not money, and it may never be. This does not mean that it cannot be useful as a commodity fulfilling needs complementary to those of currency, such as for example intermediating longer term exchanges, in a similar way financial assets, real state or gold fulfill that need today despite not being currencies.