I just got a message today from Graham Wright with a YouTube link. So I went over and there was my first article on Bitcoin, concerning the regression theorem, already done in a great audio version with accompanying slides. What a great surprise, one made possible by the magic of Creative Commons. Here it is!
What might Hermann Rorscach (8 November 1884 – 1 April 1922) see in all this?Whatever the current excitement on any given day about short-term Bitcoin price charts, what stands out for me as a watcher of the theoretical underpinnings of discourse on these events is how they bring various economic-theory concepts out into view as the people who have them in mind use them to interpret current events. As Keynes famously put it: “even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist.”
I try to stay at least 98% positive in general; critique can be more tempting than contribution. That said, sometimes understanding can be advanced by considering contrasting examples. Here are three.
First, it appears that the distinction between realized and unrealized gains and losses could be kept more firmly in mind by most. The take-home point is that for all those Bitcoin market participants (whether bull or bear) who did not actually trade today or recently, nothing much actually happened during the rapid headline price changes on the exchanges (of course, the changes might lead some to adjust their future plans according to their various forward-looking judgments). What these exchange prices actually indicate is merely the current record of transactions that are occurring on those exchanges. It is only the collection of such discrete “real time” recorded exchange events that provide the data for the construction of the lines on the trend graphs.
At times of temporary disruption of access to websites, low visibility prevails. Pre-placed automated orders execute and panicking short-termers flee. The price graphs (as they become accessible after the disruption) show the actual trades and volumes at particular times during this course of events. The price graph on a given exchange indicates actual marginal activity, at given moments, on that exchange. These exchange services are specific businesses; not magical, instant oracles of “price” in general or “value” in general. In the event, the top two exchanges, it appears from preliminary reports, were most likely under active manipulation in a possibly partly orchestrated move (and do not forget that this may well have included both upward and downward elements).
What a difference a few days can make.Second, the good old “deflationary spiral” fallacy (maybe market observers will get a couple days off from hearing that one now?) apparently misses the significance of the fact that BOTH a buyer and a seller are required to form any given data input for market price graphs. With no transactions occurring, which is what is posited in this imaginary world of “no one will sell when it is so valuable,” there is no “price” at all. Thus, the market “price” could not be too high, because it would be non-existent under the stated assumption that no transactions were occurring. Reductio ad absurdum. These exchange prices form an up-to-date historical record at a given time of actual recent buying and selling on a given exchange.
Finally, it has been a little surprising just how many Bitcoin critics employ the concept of “intrinsic value” in making the claim that Bitcoin does not have any. It was members of the Austrian school of economics, with the so-called subjectivist marginal revolution, that had seemingly put the final nail in the coffin of this ancient economic fallacy. Beginning in the 1870s, Austrian school scholars began to re-emphasize the view that value is ultimately the result of valuation, in reference to the verb to value, which is an act that can only be performed by living people (We now understand that some of the Late Scholastics of Salamanca also had this point reasonably clear several centuries earlier). After Carl Menger, this view gained steam with Eugen Böhm-Bawerk and unmistakable clarity with Ludwig von Mises’s 1912 Theory of Money and Credit and later works. This further application of the subjective theory of value clarified that the concept of “intrinsic value” is ultimately incoherent, not only with regard to goods in general, but to media of exchange as well. Mises was rather strict on this point in TMC, pp. 61–62:
Our terminology should [help to overcome] the naive and confused popular conception of value that sees in the precious metals something “intrinsically” valuable and in paper credit money something necessarily anomalous. Scientifically, this terminology is perfectly useless and a source of endless misunderstanding and misrepresentation.
What is the opposite of this? Sweeping up in 1946 after the hyperinflation of the Hungarian pengő. Source: Wikimedia Commons, Magyar Nemzeti Múzeum Történeti Fényképtára, Budapest.
Many observers have likened the rise of Bitcoin to an asset bubble. It is so customary today to use the “bubble” word in articles about Bitcoin that there may in fact be a sort of “bubble” bubble.
Another less common word introduced in this context is hyper-deflation. Some say such a thing is horrible, others that it is great. I suggest a quite different possible interpretation of these events and a word to label them: hyper-monetization.
I first heard the term “hyper-deflation” (used in a positive sense) when Bitcoin was rising rapidly from the low thirties to the high thirties over a few days in early March (Yes, this was only a month ago). While a few specialists of a certain persuasion understand “deflation” to be a great thing for ordinary people (see, for example, my 30 March 2013 post, “A short Bitcoin commentary on Deflation and Liberty”), the word still has a public-relations problem. Along with some technical issues from its several possible definitions (price level changes versus quantity of money changes, for example), and negative interpretations in conventional economics circles, it just sounds depressing, regardless of the stated technical sense in which one attempts to use it.
The word “hyper-monetization” first occurred to me around that time as a more positive term, and perhaps a more accurate antonym for the catastrophic hyperinflations that have repeatedly killed off fiat paper monies throughout their history. A related term, “de-monetization,” denotes the process of a widely used medium of exchange ceasing to function as such.
A total hyperinflationary collapse is one way de-monetization can happen. Another type of historical example of de-monetization is “bimetallist” legal tender price-fixing schemes driving one precious metal, say silver, out of circulation in favor of another metal, say gold. Yet another historical example is when a pure fiat paper standard is created after monetary authorities permanently “suspend redemption” of their legal tender notes into the precious metals they had promised to deliver.
The opposite process of “monetization” denotes something that was not a money beginning to function as one. When euros took over the respective jobs of various European national currencies, euros monetized and the previous national currencies de-monetized. Now they are historical paper relics, but no longer function as monies.
In contrast to such a legal tender conversion/transition, however, something that gains exchange value from scratch on the open market (rather than taking up exchange value through a conversion)—and does so at a logarithmic pace—might then reasonably be described as being in a process of “hyper-monetization.”
Bitcoin’s high historical and current price volatility is unquestioned. However, one problem with the “bubble” analysis is that in an asset bubble, certain fundamental matters are quite different. In a business cycle mania phase, prices of the most popular asset classes for that particular cycle are bid up as people pile their freshly printed fiat money and freshly produced fiat bank account digits into booming fields. Each party in this rush competes with all the others to acquire some of the bubbling assets. These people are misled by artificially low interest rates to bid up certain asset prices unsustainably, and this all eventually collapses, as described in Austrian business cycle theory.
However high the prices of bubble assets go, they do remain the same goods. In the case of a monetization event, though, the practical use-value of the trading unit (not only its price in terms of other goods or monies) actually does rise with the number of people using it and the depth of the market. To imagine how different this is from a classic asset bubble, it would be as if not only the price of bubble-era houses were rising, but also that their actual sought-after qualities as houses were improving spontaneously at the same time. Such houses might sprout new rooms with no one building them, with new paint jobs appearing mysteriously overnight without any painters having visited.
In this way, quite unlike the case of an asset bubble, the more people “pile into” a medium of exchange, the more valuable it actually is in its function as a medium of exchange from the point of view of its users. This is a separate matter from its price, as a few astute observers out there have so far already been noting.
This type of value has been likened to the use-value of a language rising the more people there are who can speak it. Another analogy would be to the use-value, from the point of view of each user, of a given social networking site rising the more people join it and the more they use it.
These are called network effects. In this case, the exchange value of the unit for each holder is directly related to each holder’s expectations of being able to use the unit in future exchanges (much like the value of knowing a language relates to one’s expectation of being able to communicate with it). This is in turn related to how many people accept the unit, how readily, and for what. It is important here to note, due to long-standing and common economic misconceptions, that the “future” in this sense is any future time—from five seconds from now to however many vaguely numbered years into the future a particular acting person might happen to have in mind.
When it comes to network-effect growth, the more the merrier. An analogy can be made not only to the rising stock price of a growing social networking site, but also, and more importantly, to the number of users of that site and how much it is used.
Yesterday, I saw a tweet from the insightful Bitcoin watcher Jonathan Waller. He wrote (enthusiastically, I think) that, “The bitcoin all-time chart is not even slightly sensible,” and linked to a chart [showing logorithmic growth shown on a linear scale].
This tweet got me thinking (yes, this is also a possible function of tweets). How can we make sense of this trend? Might taking some other perspective help?
This chart struck me as looking quite similar to a hyperinflation. However, instead of the exchange value of a trading unit plummeting toward the abyss as in an archetypal fiat paper-money collapse, Bitcoin has been doing the opposite.
Checking the log-scale box on the bitcoin price chart reveals a different picture. It shows a (so far) intuitively ascertainable long-term historical course with a large bump or two and some curves in the road. In this longer-term view, the exchange rate has been growing, not so much from one to two to three to four, as on a linear scale, but from 0.1 to 1 to 10 to 100. It has grown by several orders of magnitude during these couple of years.
Of course, the usual caveats must be quickly noted. “If present trends continue” can and often is infamously followed by them not doing so. But what might nevertheless be observed about this trend?
If one were somehow witnessing a phase in the first “hyper-monetization” in history, is this not more or less what one would expect to see?
The value of a paper money at the tail end of a hyperinflationary event is mainly the direct value of the physical paper (burning, wall-paper, etc.), but there is a more gradual build-up before the final collapse. The following chart is the price of Goldmarks in terms of Papiermarks from 1918–1923 in the Weimar Republic. This includes a steady logarithmic trend from 1918 to mid-1922. The exchange rate also moves from roughly 1 to 100 during those few years.
After that, however, the 1923 portion looks incomprehensible even on a log scale. As monetary authorities run the presses full speed and add new zeroes to denominations, a point is reached toward the end when the primary objective of market participants is to rid themselves of paper as quickly as possible before the last shred of exchange value evaporates.
The USD/BTC trend shows the price of Bitcoin against (also steadily depreciating) US dollars. This bears a certain similarity to the pre-1923 phases of the Weimar Papiermark/Goldmark chart. One difference is that the trend for Bitcoin from autumn-2010 to spring 2013 is the inverse of the trend for the ill-fated Papiermark from 1918 to mid-1922. In other words, for the years in question, the rise of Bitcoin’s relative exchange value shows a statistical pattern with similarities to the decline of the exchange value of the paper mark. Of course, the specific factors behind these events are quite different. In one case, the destruction was driven by ever increasing, arbitrary production of more units. In the other, the growth appears to be driven by voluntary adoption (with all its various motivations) and network effects.
If we were now actually witnessing early stages of an unprecedented hyper-monetization event, what might the top of such an event look like eventually? This is a fantastic and entirely speculative question and certainly invites the ever risky “if present trends continue” types of thinking. Looking toward the future should never be confused with looking into the past.
That said, during such a singularity-like event, were such a thing to be occurring, one might at some fairly early stage expect to see an Epic Rap Battles of History installment called, “Bitcoin vs. Fiat Money.” The key question would then soon become:
“Who won? You decide.”
[UPDATE: Seven months later, a new article including revised highlights of this article along with new material appeared: Hyper-monetization reloaded: Another round of bubble talk (7 November 2013).]
I gave a presentation at the wonderfully principle-centered 2nd annual Mises Seminar Australia in Sydney's central business district (CBD) on 2 December 2012. Here is a document version of my presentation, a close transcript arranged with selected content from the slides and rounded out with a list of readings.
Key themes included clarifying the difference between the ethical and the legal and differentiating "law" into five sub-disciplines, each with its own distinct domains and methods, conflating which (as is usually done) leads to serious problems (which we see all around us). It discusses who wins and who loses from contemporary complexity in legal definitions, and argues that the emerging action-based jurisprudence approach offers a better way of addressing the many contingent complexities of real life and culture without undermining fundamental principles of civilization in the process.
With Mises Seminar co-organizer and Liberty Australia co-founder and director Michael ConaghanDeveloping this for me started out as an attempt at a simpler restatement of the arguments in my August 2011 paper, Action-Based Jurisprudence: Praxeological Legal Theory in Relation to Economic Theory, Ethics, and Legal Practice," one that would be more accessible to people less versed in the background literature. As it developed, new territory and reformulations emerged. This included the three theory modules designed to help people grasp some difficult but crucial concepts without having to delve into stacks of academic books and articles to glimpse a solid initial understanding (after which, those stacks of books and articles can more profitably follow, and a strictly select list of them does, on the last two pages).
A substantially expanded and elaborated academic journal version, with more detailed references and footnotes and some additional new angles, especially on the relationship with action-grounded criminology (our understanding of what crime and criminality actually are), is also in the works.
This was my first trip south of the equator. I had a wonderful time in Sydney and got to meet a number of people I had previously encountered only online, including among many others, organizing team members Michael Conaghan, Benjamin Marks, Washington Sanchez, Samuel Marks, and Anthony Coralluzzo. Before this weekend, I had only briefly met the legendary libertarian teacher/promoter and enthusiastic intellectual trouble-maker Professor Walter Block, but this time had the opportunity to speak with him at greater length. My presentation also came just after one of his (now in his 70s, he did five segments in two days and looked ready to do 12 more). I was stepping up right after someone who has been presenting at conferences since I was learning to walk, and I was touched afterwards that he referred back to content from my talk several times in his later segments.
I also got to talk at length with Michael Conaghan, co-founder and director of Liberty Australia, who is quickly becoming legendary himself in online discussion circles for regularly coming up with spot-on quotations from the relevant literature (even with occasional video clips of old Q&A sessions with Rothbard personally addressing the question at hand) and dropping them out of thin air into active discussion threads.
My last day was a solo trip by city bus to Bondi Beach and MacKenzies Bay. I told the waiter at the amazing Hurricane's Grill Bondi Beach that I didn't feel like leaving Sydney to return to the frozen German winter, but would rather send for my family to come down and join me. He just smiled and said this is the kind of feeling a great many people who visit Sydney seem to report. I could believe it. Maybe Hurricane's delivers to Germany?
Philosophers struggled for centuries to understand the paradox of value, the mystery of why certain luxuries such as diamonds and gold are considered more valuable than certain essentials such as water and food.
Everyone must have water, yet it is usually not that hard to get. We can buy a bottle or it comes out of the tap. Diamonds are rare and expensive, but optional. Men, at least, seem to be able to get along well enough without them. It seems counterintuitive that something essential to everyone’s life could be less valuable than something that seems so much more optional.
Many thinkers tried to understand value as a property of things. They thought that a table, for example, has the property of being flat, having legs, being made of wood, and having a certain value or usefulness. Such approaches are called objective theories of value, because value is seen as a property of the object.
This idea is found in our everyday language when we say that “diamonds are valuable.” But this is also the kind of thinking that produced the paradox of value so it is unlikely to resolve it.
The breakthrough came with two of the greatest ideas in the history of economic thought: the subjective theory of value and the concept of marginal utility. Carl Menger, a professor at the University of Vienna, played a key role in formulating and spreading these two ideas in his 1871 book, Grundsätze der Volkswirtschaftslehre, translated as The Principles of Economics.
Menger is considered the founder of what came to be known as the Austrian School of economics. The name started as a way to distinguish this approach from that of the German Historical School, and the name stuck. Ludwig von Mises, in his 1949 treatise, Human Action, further clarified and extended subjectivism and marginalism, and even insisted that these are among the foundations of any sound economic reasoning.
The subjective revolution clarified that the key to value is valuation. Valuing is an action; it is something that people do. The concept of value makes sense as a relationship between an acting person and the means they select in pursuit of the ends they seek. The object of valuation can be tangible or intangible, base or sublime. It can be anything whatsoever that a person chooses as an end or means as demonstrated in what they actually do. In this view, the value of a thing derives from people valuing it.
Different people have different priorities. The same person has different priorities at different times. A person might buy a bottle of water, but after reading an article on possible risk from plastic bottles, that same person the next day might disvalue and avoid an identical bottle of water. When this same person a year later flies to an anti-plastics conference and crashes in the desert, a plastic bottle of water might suddenly become one of the most valuable things in the universe—to that person, at that time, and in that place.
The marginal revolution built on this insight into the subjectivity of value. No one is actually ever in a position to make a choice between “water in general” and “diamonds in general,” or between all water and all diamonds.
Let’s say I want a drink of water. I go to the kitchen, pour a glass, and drink it. What I chose was not “water in general” but “a glass of water right now.” I didn’t choose two liters of water and I didn’t choose a glass of water tomorrow instead.
This leads to another important concept. If I have one apple, I might just eat it. If I have a second apple, I might give that one to someone else. If I have a third apple, I might keep it for later. In this example, there are three different uses to which I have put each of the three apples.
This has a key implication hiding just below the surface. I showed my priorities with these three uses of each apple. We know this because this is the actual order of uses to which I assigned each additional apple. We know in this example, that I valued eating an apple over giving an apple away because I ate the first apple and gave away the second one. Saving an apple for later was only my third priority for using apples. I only met that priority when I had the third apple and not before. If I had no third apple, my third use for apples would just be left unmet.
So each additional apple I obtained I put to a lower priority use than the apple that came before it. This means that each additional unit of the same good has a lower value to me than that of the unit I used before it. This is the Austrian, or subjectivist, version of what economists call the law of diminishing marginal utility.
All of this has important implications for the idea that value could be measured. To measure distance, we need a unit that is always the same, such as an inch. But with value, things are quite different. In our apple example, each additional apple had a different value than each of the others. Imagine trying to measure a distance if each inch you used was different from every other inch!
The Austrian theory of money and prices builds on this insight. Units of money can be analyzed just like units of apples. Money also has important additional properties and uses, but the theory of money and pricing in the Austrian approach is built on this theory of value and cannot contradict it. It can only elaborate on money as a special case. In other words, money too cannot correctly be described as a measure of value in the same way an inch is a measure of length.
This means that value cannot be measured as we measure things in the natural sciences using length, time, or volume. That kind of measurement uses cardinal numbers such as one, two, and three. What we can use with value is the concept of ranking using ordinal numbers such a first, second, and third. An acting person shows a preference for one thing over another, demonstrates a ranking and ordering of values with every choice and every action.
The dual insights that value is the result of people valuing and that people do not value things in general, but things in particular, resolves the ancient paradox of value. While there were some precursors of these ideas in the history of economic thought, their clear modern formulations originated at the University of Vienna starting in the 1870s and they remain central concepts in the foundations of what is still called the Austrian School of economics today around the world.
Research and writing portal for the work of Konrad S. Graf. Focus areas include monetary theory and bitcoin, legal philosophy, evolutionary health, Japanese translation, and Spacial Dynamics.
