What Does Bitcoin Mean for Austrian Money Theory?

What Does Bitcoin Mean for Austrian Money Theory?
Profile photo of Logan Albright

bagogoldLibertarians tend to agree with each other on most things. We all favor less government regulation, lower taxes, less involvement in international conflicts, and more personal freedom. There are a few areas, however, in which the movement remains sharply divided. One of these areas involves the nature of money.

The two schools of thought are essentially the “gold standard” crowd versus the “competing currencies” crowd. Nobel laureate F. A. Hayek argued strenuously in favor of competing currencies, pointing out that it made no sense to praise the benefits of competition in every good and service, while denying those same benefits for currency itself.

Ludwig von Mises, and his most celebrated student Murray Rothbard, on the other hand, argued that commodity money, specifically gold, was the only kind that could ever enjoy the stability needed to prevent inflation and credit busts.

Mises formulated this argument as “the regression theorem” of money in his first book, The Theory of Money and Credit, in 1912. The theorem, in brief, runs as follows:

People will only accept a medium of exchange if they observe that it has value, and can actually be exchanged for things. The only way to observe that is by looking at whether it was so used in a preceding time period. Thus, this chain of observations can be followed back until the first instance in which a particular type of money was used as a medium of exchange, and in order for those first adopters to accept it, it must have had value independent of its use as a medium of exchange, or in other words, be a commodity. Paper money, especially that with no commodity backing, is only adopted when governments force it upon people.

Mises’ theory is elegant, and for a long time it has been accepted wisdom among many Austrian economists. The only trouble is that Bitcoin is in the process of proving it wrong.

Although commodities have historically been successful, history does not prove inevitability, but merely what people have chosen in the past. Mises himself makes this point in his methodological treatise, Theory & History, in a scathing critique of statistical methods within economics.

The science of human action for which Mises coined the term praxeology, as Rothbard later pointed out, does not deal with why people choose one thing or another (psychology) or with what they should choose (ethics), but merely deals with the ramifications of the fact that they do choose and act towards goals. Economics, therefore, as a subset of praxeology, cannot predict what type of money will be chosen in the future or why. As Jörg Guido Hülsmann wrote in The Ethics of Money Production, “one cannot tell on a priori grounds what the natural money of a society is. The only way to find this out is to let people freely associate and choose the best means of exchange out of the available alternatives.”

The fact that Bitcoin, a fully digital currency with no commodity backing, is now being adopted by increasing numbers of people as an alternative currency would seem to cast doubt on the inevitability of commodity money.

When a theory, however logical, finds itself at odds with observed reality, there are only two possible courses of action for a rational thinker. The first is to discard the theory in favor of one that accurately describes the world as we observe it. The second is to find reason to doubt the reality of our observations. One explanation could be that while the regression theorem looks only at past value, it neglects to take into account the expectations of future value, which is what have driven Bitcoin. Another possibility is that only when commodities are actively prohibited as currencies by government, can a digital fiat money arise and gain popularity. AT this point, it’s too early to tell.

Bitcoin may yet fail, in which case Mises’ theorem will remain as a powerful argument in favor of the gold standard. If it ends up succeeding, however, an alternate explanation will have to be found.

  • Hy Alur

    That's a great idea, as long as it begins with "I wised up and will no longer promote this Ponzi scheme"

  • Jeffrey Tucker

    Looks like I'm going to have to explain this again in an article.

    • Frank Zeleniuk

      Money is backed by confidence. The confidence in a currency comes from the people. in 1913 there was lots of confidence in the government of the USA. It has slowly eroded over the past century

  • Hy Alur

    The author fails to mention or take into account step ZERO of the theorem, that unlike gold that had to be mined by intense labor and capital and this activity took place across wide geographic areas and populations, bitcoin was created by one person, "created" as in placing them into his virtual earth making them easy to obtain for himself and a handful of those that followed.

    Only after they themselves had obtained at least 1/4th or more
    ( see… )
    , all of them EASY TO MINE BY THEMSELVES BY DESIGN, only then they pronounced "it is SCARCE!", therefore it is VALUABLE.

    This small group has been "cashing" in into fiat AND GOLD on their vapor scheme for some time.
    Retailers see it is a marketing tool (instant conversion to fiat upon receipt), not a store of value as has been explained by others.

    Mises and Rothbard can rest easy, the bagholders of bitcoin not so.

  • ChrisLeRoux

    This is utter nonsense and demonstrates total lack of understanding of the regression theorem which does not claim a few people cannot use some bunk as a MOE for a while.

  • @tradewithdave

    I find it a bit difficult to understand why bitcoin is not considered within a framework of Mervyn King's proposal for a "divorced currency" wherein the means of exchange is separated from the store of wealth. Isn't that essentially the emphasis behind the Economist Magazine's "money as a technology" meme? Divide… then conquer… seems logical enough.

  • Stephan Livera

    Hi Logan, I believe you are misunderstanding what Mises point with the regression theorem was – to properly understand why, I recommend you read section 5 (particularly page 10) of Konrad Graf's "On the Origin of Bitcoin" here:

    Put short, it is more correctly understood as "showing your work" than a claim of logical impossibility. There is no contradiction between the regression theorem and bitcoin's use as money.

    • Peter Surda

      Maybe it would be beneficial if the author first familiarised himself with the appropriate literature on the topic. Apart from aforementioned Graf you can also check out my recent paper:

  • Davis

    This is also misunderstanding the difference between libertarians and Austrians.

  • AE Hall

    This is a blithe misunderstanding as to what the regression theorem even means. It means that money, as a concept derives from the moneys non-monetary use (since money is, after all, just an idea made manifest by acting man's demonstrated preferences). Bitcoin doesn't prove anything in the regression theorem wrong as money has been a perpetual social function dating well before the very concept of a virtual currency- let alone modernity.

  • thellama73

    I believe you misunderstand my argument slightly. I did not say that advocates of gold object to the use of Bitcoin, just that they do not believe fiat currency will be accepted as money on the free market. Hülsman explicitly states this in the Ethics of Money Production when he says that electronic currencies are unlikely to succeed. My point was that, if Bitcoin ultimately does succeed as a currency, we need to reexamine these assumption.

    The fact that there is a division of thought is indicated by the enthusiastic embrace of Bitcoin among many libertarians, who evidently believe it will succeed despite not conforming to the historical norms of gold and silver.

  • Cosmin

    I was going to reply to the article, but you said exactly what I wanted.
    My view of Bitcoin is that it's useless as a store of value. There is, right now, a tremendous amount of hoarding of bitcoins by early miners or whoever, meant to trick latecomers into buying and holding Bitcoins, so the early adopters can divest themselves over time, at high prices. If Bitcoin is to become as ubiquitous a means of exchange as its proponents claim, that function has infinite competition from other crypto-currencies and can be accomplished irrespective of the value of a Bitcoin.

Profile photo of Logan Albright

Logan Albright is a writer and economist in Washington, DC.

More in Blog


Join Us at the Rothbard U 2018 Opening Reception

Mises CanadaJuly 10, 2018

Understanding Economic Theory Is Essential for Understanding the Benefits of Free Trade

Patrick BarronJune 23, 2018

China’s Currency Manipulation Does NOT Harm Its Trading Partners

Patrick BarronJune 19, 2018

Trumping to Serfdom

Doug FrenchJune 18, 2018

The market provides its own punishment for irrelevant discrimination

Patrick BarronMay 20, 2018

Unilateral Free Trade Would Benefit All UK Citizens

Patrick BarronMarch 21, 2018

The EU elite are ignorant of the true meaning and importance of “comparative advantage”

Patrick BarronMarch 15, 2018

Don’t Trust the “Trump Boom”

Taylor LewisFebruary 20, 2018

Inflation has Central Banks Playing Musical Chairs

Doug FrenchFebruary 8, 2018