The Bitcoin Divide: Austrian Economics, Mises, and Money


There has been a lot of talk recently regarding whether Bitcoin is money, simply a medium of exchange, or a fiat bubble waiting to burst. I thought I’d weigh in on the debate with some salient critiques on situation. I have more to say about this but these are my immediate thoughts.

The Emergence of Money

The need for money arises from the problems inherent in direct exchange between individuals in a barter economy. In a barter economy, one good is directly exchanged for another good; Person A exchanges their bread for Person B’s beef, and so on. The problem arises from the unlikelihood an individual will find someone willing to exchange the particular good(s) they possess for the particular good(s) someone else possesses. If Person A is looking to exchange his bushel of grapes for a loaf of bread, what is the possibility of finding a Person B with a loaf of bread who is willing to exchange it for A’s grapes? This mutual or double coincidence of wants expresses the unlikelihood of each party to an exchange possessing the particular good (in the particular quantity) that the other wants, at any one point in time. Hence, the need for a medium of exchange arises to correct this problem, allowing the medium to be exchanged in lieu of trading actual goods to facilitate an exchange; this is known as indirect exchange.

Austrian economist Ludwig von Mises is often cited by Austrian economists for his regression theorem, which asserted that all money arises out of a particular good becoming universally accepted, as a succinct theory upon which all money must theoretically adhere to.The implication of this theory is that in every instance of money emerging, it was at one time a good with value independent of its use as money; as a nonmonetary good. We can see this with gold; before it came to prominence as money, it had other nonmonetary uses in jewelry, ornamentation, decoration, etc. Its value derived from these nonmonetary uses until, at some point in time (we of course can never know exactly when), it began being used as a medium of exchange to such an extent that it achieved wide acceptance and ascended to money status.

Intuitively, Mises’s regression theorem is logical and concise; for anything to become universally accepted as a medium of exchange in a barter economy, it must be have been a good with uses independent of exchange, because no one would have originally accepted it as payment if they had no use for it; it would have been valueless. Mises’s regression theorem is a bottom-up theory of the spontaneous emergence of money; the alternative for this is a top-down constructivist approach by which some authority (government) establishes something as money by decree. The constructivist approach is a coercive mechanism bypassing the temporal element of achieving a universally accepted medium of exchange by dictating everyone must accept the government instituted currency, or else. In this way, money need not be a store of value at all; more than likely the government is going to choose a commodity with almost no value (pieces of paper with printed numbers on them) in order to enrich itself at the expense of the public, and allow, through the inflation of the currency, an expansion of government spending without using the more visible methods of taxation or debt financing because they are more politically unpopular. To wean the public from their logical desire to use commodities as their currency, the government uses paper certificates redeemable in denoted quantities of the favored commodity. When the government decides to stop the charade after it realizes redeemability imposes constraints on its ability to inflate or debase the currency, and thus on its spending ability, it halts redeemability of the currency and finally divorces itself from the original commodity it was intended to represent. As we can see, the coercive constructivist method may “work” in that it achieves universal acceptance as a medium of exchange, but the coercive mechanism, imposing this on individuals is illegitimate from a libertarian standpoint and therefore invalid if one is inquiring how money emerges on the market.


From an Austrian perspective, the traditional characteristics upon which all money may be evaluated are six fold: Divisibility, durability, portability, scarcity, recognizability, and fungibility. The first characteristic is divisibility, or the ability of money to be divided into definite, measurable quantities. The second characteristic is portability, or the ability to carry large quantities of the money with little transaction costs, i.e. it is easy to carry (value dense). The third characteristic is durability, or the ability to withstand daily usage without significant wear and tear that would impair or destroy its value. The fourth characteristic is recognizablility, which goes back to the point emphasizing individuals accept it as a medium of its change and recognize its value. The fifth characteristic is scarcity because no one wants to have a medium of exchange that is not superabundant and is not too rare either. The last characteristic is fungibility which refers to uniformity; one unit of money must be identical to, and equal in value to, every other unit of the currency. Gold has theoretically and historically fit these criteria well in many cultures because it is very uniform, divisible, scarce, a recognizable store of value, portable and durable.

The Divide

There are two strains of individuals who, as per se Austrian economists, do not accept Bitcoin as a form of money. The first strain can be characterized as those who use Mises’s regression theorem to reject Bitcoin as money. These economists have accepted Mises’s regression theorem unequivocally as sacrosanct; they (e.g. Gary North) challenge individuals to not just praise the positive features Bitcoin may possess compared to other monies and note all the challenges it poses to the state money monopoly (obviously a great thing), but, understandably, to develop a paradigm subject to reasoned evaluation defining money and describing the characteristics distinguishing money from a humble medium of exchange. The implication is these individuals will not accept Bitcoin as a form of money (or at least a legitimate form) regardless of how widely accepted Bitcoin becomes. They believe to become money, it is fundamental it must originate from a nonmonetary use as a commodity good. Ideally, they reject a definition of money as simply a universally or generally accepted medium of exchange if this definition does adhere to Mises’s theorem. Austrian economics assumes all of economics is logically deductible from basic premises, but for a lot of people it probably seems like North’s refusal to consider that Bitcoin may achieve money status in the future is an irrational clinging to gold and hard money in an age when technological advances may prove digital currencies to be superior to hard money currency.

The second strain of Austrian economists who reject Bitcoin as money are those who understand Bitcoin is used as a medium of exchange in smaller circles, but until Bitcoin gains a wider (general, or near universal) acceptance as a form of money in “restaurants, supermarkets, movies,” as well as for utilities and other commercial entities, it cannot be considered money. Likely, these individuals (Block, Gordon, Murphy, etc.) accept the validity of Mises’ regression theorem as a highly accurate predictor of the spontaneous emergence of money on the market, but also accept deviations from this theorem based on the reality of the situation; if everyone accepts Bitcoin and pays for goods in Bitcoin, how can we not call Bitcoin money? Similarly, as unfortunate and illegitimate as it may be, the dollar is money because it is universally accepted as payment for goods and services even though it achieved this status by a condition of coercion.

Those who believe Bitcoin is money likewise fall into two categories. One group of supports reject Mises’ regression theorem as a thing of the past. In their view, Bitcoin is revolutionary and requires upsetting the existing paradigms, both in Austrian economic theory and in the government monopoly on the supply and “coining” of money. Many of these individuals are young, tech-savvy, and optimistic about the future progress of technology. These individuals seem very concerned with “hacking the state” and using technology and ingenuity to bring about the inevitable demise of government monopolization in every manifestation. They consistently identify the virtues of Bitcoin and believe it’s strengths make it superior to both fiat currency and gold.

Others who support Bitcoin as money seem to simply have a low threshold for what qualifies as “money” under their definition. Some, such as William Anderson, believe since Bitcoin is accepted (somewhere) for payment of goods, thus facilitating indirect exchange, and since it operates as a parallel currency (somewhere) it qualifies as money. Therefore, they do not believe it needs to be universally accepted to qualify as money; if it functions as a medium of exchange and can be accepted as a form of payment, it must be money. At this point, some of them think Bitcoin has become recognizable enough to be accepted by a large enough number of people to qualify as money. (Some from each category likely are not aware of Mises’s regression theorem or implicitly reject Mises’s theorem by adopting such a low standard for a definition of money.)

Lawrence H. White, an economist at George Mason University, thinks a little bit differently; his train of thought is very useful when examining Bitcoin as a form of money so I will go through it briefly here. In this perspective, to define whether something operates as money, one needs to define the audience. Nothing, no commodity, currency, or anything else, is universally accepted as a medium of exchange. At particular points in time, gold and the U.S. dollar have each been in large-scale acceptance by huge swaths of the world population, but nothing has ever achieved universal acceptance throughout the earth. Hence, we cannot define money as requiring universal acceptance. Each country has her own currency; in that circle, defined by their borders (their population), the currency operates as money. In many cases, it is the coercive element of legal tender laws that forced acceptance, but it operates as money nonetheless.

Murray Rothbard had his own regression theorem of international anarchy, which can prove useful to apply to the theory of money. Rothbard said if we accept anarchy at the inter-State level, why should we limit anarchy’s validity only between states? Why not regress this down to the most basic level and accept the plausibility of anarchy at the individual level? Similarly, if we accept that money can occur without universal acceptance globally and depends on the circle of users, we must accept money can manifest even in some of the smallest circles, such as the cryptohippie circle (e.g. Paul Rosenberg). Ultimately, in certain circles where individuals readily give and receive Bitcoin as a medium of exchange, it is operating as money in these circles. In many cases, economists define money with respect to society as a whole; that is why many Austrian economists say Bitcoin is not yet money, but may be at some point in the future. This is not wrong since they are implicitly looking at whether Bitcoin operates as money across the whole of society, which Bitcoins clearly do not. However, I would argue the definition of money cannot be limited to whether it is universally accepted across all of human society, but must include smaller circles to be valid. To define whether a currency is operating as money, you must define your audience. From here, it becomes academic and arbitrary how we decide exactly when a medium of exchange becomes generally accepted by a population. In many cases, we can easily tell when something is or is not functioning as money; the U.S. dollar functions as money in the U.S. economy, Bitcoin does not.

Another obstacle Lawrence White brings up regards the problem with anointing Bitcoin as a medium of exchange. He says although the $30 million per day Bitcoin volume is significant, “not all Bitcoin transactions represent purchases of goods and services, and thus not all use is monetary use. I suspect that purchases of goods and services are only a small fraction of Bitcoin transaction volume…When John Doe buys Bitcoins with dollars in order to speculate against dollars, and expects to later sell his Bitcoin holdings for dollars, he is not using those Bitcoins as money.” In the U.S. economy, Bitcoin is functioning largely as a speculative (or hedging) financial tool and is an extremely volatile asset. Further, all of the problems Gary North constantly references to this nature, such as the bitcoin heist of $100 million (small pie compared to government theft through fiat money) need to be rectified if bitcoin is ever to reach money status in America. Bitcoin will need to over and over prove its utility as a secure payment processing tool to allay the fears of the general public and get them to adopt bitcoin. Further, brick and mortar businesses as well as traditional online retailers must participate in order for bitcoin to become money. (If someone like Amazon started allowing purchases to be made using bitcoin, it would lend a huge boost to bitcoin’s legitimacy and its ability to operate as a currency).

We must also remember gold is not immune to some of these same problems bitcoin has; a heavily armed individual might rob any individual, and business, or any gold storage facility and steal significant amounts of wealth from legitimate owners. $100 million might be a spectacular sum, but theft on this scale is very rare and speaks to the problems inherent in any organization entrusted with the deposits of numerous individuals. There is always the possibility of a disreputable individual taking advantage of unsuspecting users and stealing from then. I think people are so alarmed because of how easily someone might disappear and evade tracking than anything. It also doesn’t speak to a flaw in bitcoin itself but a flaw in the nature of human users who might be too trustworthy or too mischievous. Lax security and carelessness in the storage and transfer of any form of money will result in significant risks of theft or loss.

Although Bitcoin’s lack of extensive use as money in transactions for tangible goods has continued to be used against it, this may present a case for Bitcoin as having a nonmonetary use (similar to gold), which at some point may become generally accepted and meet Mises’ regression theorem. From what I understand, Bitcoin began as a good before it became a medium of exchange. The only option for original Bitcoin owners would have been to trade them for U.S. dollars or some other currency; no goods would have been available for purchase in Bitcoin until later because sites accepting Bitcoin in exchange for goods were not yet in existence. Bitcoin’s utility comes from its use as a quick, anonymous, and nearly cost-less payment processor. The network of users supporting the payment verification is nearly impossible to duplicate by a central authority, making this aspect very valuable. Bitcoin has been a very volatile asset over its short lifespan and is likely not going to change anytime soon. This does not preclude its ability to stabilize and become money at some point in the future, however.

To analogize with the past, the Bitcoin network is akin to a Wells Fargo in the 19th century, except instead of holding money in banks and transporting money using stagecoaches,  sailing ships, and steamers, Bitcoin holds money in “virtual wallets” and uses its advanced network to transfer Bitcoins over vast distances almost instantaneously. This is an explicitly nonmonetary use for Bitcoin and can satisfy Mises’s regression theorem. Bitcoin would likely not emerge from a state of barter as the most saleable good; that much is certain. However, as a society progresses and becomes more technologically advanced, the good that was once the most saleable may no longer be the most saleable good. Menger explicitly acknowledges this when he mentions that cows, before gold, were the most saleable good and were thus the generally accepted medium of exchange, until society advanced sufficiently enough and cows were supplanted by gold because gold meshed better in a more advanced societal framework. There is no reason to think Bitcoin, or some other currency, cannot replace gold in the indefinite future for various reasons, many of which are not evident to us today. As technology pervades our daily life more and more, Bitcoin becomes ever more viable as an alternative to gold as the most saleable good.

Thus, we do not need to throw out Mises’ regression theorem. However, we do need to take a novel view of the theorem in that financial instruments could be considered candidates for developing into money if the right conditions emerge to facilitate general acceptance as a medium of exchange. Mises’ theorem still applies to market-driven, spontaneously emerging currencies, and only time will tell whether enough individuals will come to accept bitcoins as money. What is clear is that if we define money within the scope of particular groups using it as a medium of exchange, we can absolutely see bitcoin does operate as money in small groups who covet the qualities Bitcoin possesses.

The future looks promising; more and more bitcoin-based businesses are appearing, nonprofits are becoming bitcoin friendly, websites are accepting bitcoin donations, there is a lot of opportunity for growth in the use of bitcoins as money.To refuse to accept the possibility of Bitcoin as money in the future either seems incredibly short-sighted or does not adequately understand the bitcoin network’s value.

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Unfortunate Economics

In a recent article on The Bleeding Heart Libertarian, Jason Brennan talks about the problem behavioral economics poses to apriorism in Austrian economic theory. He says that Austrian economics, advanced by “hack” scholars such as Ludwig von Mises and Murray Rothbard, bases its theory on the idea that all individuals act rationally. By this, we can assume him to mean that every individual acts purposefully and always makes the best choice given competing ends. Defenders of this Austrian apriorism are, to Jason Brennan, extremely naïve to believe this since behavioral economics data sets empirically refute the Austrian conception of man and choice over and over. For him, anyone with half a brain can figure out that humans don’t make choices that make them the best off economically, viz. they do not make value-maximizing choices. Brennan’s doctrine and perspectives on Mises and Rothbard are extremely convoluted and let’s see why.

Acting rational (redundant), from an outsider’s or non-Austrian perspective, can be defined as choosing the appropriate means to reach a particular end. There are two ways in which we usually characterize human action as irrational. First we may say that the means to achieve an end is irrational; we believe that either better means could be used to reach an end or the means chosen are utterly incomprehensible to the ends chosen. In essence, by saying this we believe that the only way man can act rationally is by choosing the absolute best means suited to reaching a particular end; nothing short of this will do. Second, we may say that the ends trying to be obtained are irrational; we believe the ends an individual has chosen are detrimental to their own well-being and is a foolish pursuit. No doubt, Brennan is focusing on the former.

As Jeffrey Herbener stated in his own refutation of Brennan, “Knowledge about human action learned by experience is contingent on the person, place, time, and circumstances of the action.” The problem characteristic of Brennan’s approach is behavioral economics attempts to define the circumstances surrounding a decision, a monumental task in the first place. Again, how can one truly know all the relevant circumstances surrounding a decision that would enable us to make a truly rational decision? Further, behavioral economics is a foolish pursuit because of one simple fact: value is subjective. Making the attempt (or lack of attempt) to quantify the subjective values an individual (let alone a group of individuals) holds is futile. These are not cardinal values; there is no way to measure them. Hence behavioral economics is going to make questionable conclusions because you have to arbitrarily quantify subjective values to even begin to create the framework for deciding whether someone’s behavior actually maximized value or not.

Moving on, we have to realize what is meant by purposeful human action, or “value-maximizing” human action. Since values are subjective, what is a value-maximizing choice for one individual may be different for another. The choice to go to McDonald’s and eat a double cheeseburger may be value maximizing for one, while staying home and cooking their own cheeseburger on the grill may be value maximizing for another. The science of human action says a priori when a human being makes a choice, he is displaying his preferences, and this action necessarily is a value-maximizing choice.

So many intangible factors go into deciding preferences; just because, given the choice, someone chooses the $7 an hour burger flipping job over the $9 an hour one does not mean that they acted irrationally. The fact that they chose the $7 an hour one means that some other tangible or intangible factors went into their demonstrated preference of the lower paying burger flipping job. Maybe their conscience won’t let them take a $9 an hour job when they know their marginal productivity of labor is only $8. Or maybe they like the number 7. Or maybe they asked their wife what job to choose. Or maybe they wanted to stick it to Austrian economists and try to prove that humans do not act rationally so they deliberately chose the lower paying job. Or maybe they went eeny, meeny, miny, moe and picked the $7 an hour job.

How could we possibly quantify these subjective factors? We cannot. Thus, we must understand that human action is demonstrated preference; a priori, choosing one thing over another means one values the thing they chose over the thing they did not choose, regardless of what we think about the prudence of their decision-making or the way they go about valuing things. That is what is truly meant by acting rational and maximizing values. It is not choosing the thing which will bring someone the greatest $ value, the greatest long-run happiness, the least amount of harm, or any other criterion that a behavioral economist will try to present as “rational.”

As Jeffrey Herbener said, “Whether a person chooses “rationally” in the neoclassical sense or “less than rationally” in the behavioral sense, in a human action the person chooses. Choice is a universal feature of human action. It is no mark against the Misesian conception of economic theory that it does not address the contingent features of human action. That’s the task of economic history.” Our opinion of what ends are appropriate or what means are appropriate to reach a particular end is subjective. To that extent, rationality, in the sense Jason Brennan means, is subjective. Just because the thief chooses to obtain an income by stealing rather than earning it doesn’t mean their decision is irrational; our opinion of rationality depends on our point of view. Similarly, just because the thief chose to steal the $100 cathode ray television rather than the $1000 3-D television does not mean their decision is irrational. Just as when we exchange one item for another it necessarily means that we value the item we receive greater than the item we give up in return, when we choose one course of action over another necessarily means that we believe our course of action is suited to the end we are aiming for. The end itself may not even be totally understood or acknowledged by the individual striving toward it, but it exists nonetheless.

If you want to continue defining rationality as your own subjective opinions on what is rational and what is not, go ahead; but don’t try to present it as scientific or empirical when you are doing nothing more that deifying your own values and doing not much more than palm-reading to try to quantify someone else’s subjective values. As we can see, rationality in the context of Austrian economics does not mean whether we think a means is conducive to a desired ends, or the layman’s definition of rationality. They are not the same thing and cannot be used interchangeably. Nor can value-maximizing be defined as “choosing the thing which will bring someone the greatest $ value, the greatest long-run happiness, the least amount of harm, or any other criterion that a behavioral economist will try to present as ‘rational,'” because that is not what value-maximizing means in the cintext of Austrian economics.

PS. After I wrote this, I found a more eloquent version of what I said on by Michael Rozeff, so check that out too.