Re-Versing Gresham’s Law and Bisecting From Mises Regression Theorem

Juice
Juice
Sep 9, 2018 · 10 min read

I’ve tried to write on this subject a few time and even retracted my view as I realized I hadn’t properly understood Mises Regression Theorem. Although, I have written about it since then (I think correctly) I still find myself thinking about it lots. And I think Gresham’s law is relevant which I touched on in my last writing (but couldn’t really fit into the piece what I wanted to get at).

Gresham’s law has never sat well with me and I really want to read the letter(s) which he sent to the queen to tell her that the bad money (fiat) supplanted the good money (ie gold).

I think we might ask if there aren’t obvious advantages to a economy that uses a fiat based system over one that uses a medium that both doubles as a medium of exchange but also as a commodity used in something else non money related.

If there was a scarcity for such a resource that implied that it could be a “good money” then it would seem better to use a worthless commodity and then allow this useful resource to be freed up for use and to not be so scare for the industry it serves.

I think this is just as reasonable if we think about our more ancient tribes. Why should rice be most efficiently used as a money in times of a famine?

I think then, at least from a reasoned perspective, it might make more economic sense to use an otherwise non-useful medium for what we call money. And this would suggest that Gresham’s definitions are backwards (if we take the account at face value because again I would like to see the source).

On the Origins of Money

If this is true we might ask if this phenomenon of turning to fiat or money with no other use-case (we could now call GOOD money perhaps in our inquiry), because of its more efficient implications, could arise from natural (ie non-reasoned) order. This is what (some argue) the regression theorem comes down to-it suggests that money must historically be reduced to some (most saleable) commodity that already has a price based on an existing use case.

This is what I have previously questioned in my writing on the subject.

The basic idea is we (and Mises etc) are questioning whether money arose naturally, or could arise naturally, without great ability to reason. The Austrian view is that money arose through intense barter and that has a natural explanation.

But I always suggest if there is a simpler explanation and can be shown to come even more from natural order then it should be considered a strong suggestion.

Paging Satoshi

This post was made to support the idea that Bitcoin could become money (a post in which we will look at Satoshi’s reply to). This section explains the regression theorem:

As Rothbard explains in Man, Economy, and State (p 270),
“…a money price at the end of day X is determined by the marginal utilities of money and the good as they existed at the beginning of day X. But the marginal utility of money is based, as we have seen above, on a previously existing array of money prices. Money is demanded and considered useful because of its already existing money prices. Therefore, the price of a good on day X is determined by the marginal utility of the good on day X and the marginal utility of money on day X, which last in turn depends on the prices of goods on day X — 1. The economic analysis of money prices is therefore not circular. If prices today depend on the marginal utility of money today, the latter is dependent on money prices yesterday.” [all emphasis added]

The poster suggests Rothbard concludes:

Rothbard then goes on to explain that in order for money to emerge from a barter economy, it must have a preexisting commodity value.

It then explains a relevant point, namely, that a commodity money needn’t always retain its non money use case in order to stay relevant as money (this is a great argument versus people that say Bitcoin has no floor like gold because they are implicitly citing this Austrian line of thinking):

However, once an economy has been monetized and a memory of price ratios for goods and services has been established, a money may lose its direct commodity value and still be used as a money (medium of indirect exchange). Rothbard explains (p 275):
“On the other hand, it does not follow from this analysis that if an extant money were to lose its direct uses, it could no longer be used as money. Thus, if gold, after being established as money, were suddenly to lose its value in ornaments or industrial uses, it would not necessarily lose its character as a money. Once a medium of exchange has been established as a money, money prices continue to be set. If on day X gold loses its direct uses, there will still be previously existing money prices that had been established on day X — 1, and these prices form the basis for the marginal utility of gold on day X. Similarly, the money prices thereby determined on day X form the basis for the marginal utility of money on day X + 1. From X on, gold could be demanded for its exchange value alone, and not at all for its direct use. Therefore, while it is absolutely necessary that a money originate as a commodity with direct uses, it is not absolutely necessary that the direct uses continue after the money has been established.”

So it does seem acceptable that a money can have no other use case. This doesn’t suggest money can arise with no prior use care but it lends support to the inquiry.

Satoshi’s Response

I have read this response from Satoshi many times and so have many other people. But I went to re-read it today because I knew I had an essay to get out and I realized that it says exactly what I meant to declare and explain.

The first part:

As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties:
- boring grey in colour
- not a good conductor of electricity
- not particularly strong, but not ductile or easily malleable either
- not useful for any practical or ornamental purpose

What Satoshi did there was very quietly remove from the argument the contention that gold has a non money use case. You see, I don’t think it did, I suspect it arose as money because it wasn’t otherwise useful-perhaps. Rather than use gold as an example of a money that arose with no use case Satoshi used the concept of a medium LIKE gold and then he stripped of the non money use cases.

It’s a very careful surgical move.

I think some might not think that it can be shown that Satoshi was thinking in the direction I am but here is the explanation he gives now that he doesn’t have to defy already accepted (Austrian) economic theory:

I think the traditional qualifications for money were written with the assumption that there are so many competing objects in the world that are scarce, an object with the automatic bootstrap of intrinsic value will surely win out over those without intrinsic value. But if there were nothing in the world with intrinsic value that could be used as money, only scarce but no intrinsic value, I think people would still take up something.

So I think it’s clearly shown that Satoshi is not inline with Rothbard and the extrapolation from the regression theorem that suggests money must have arisen through barter as an already traded commodity.

How Could a Non Useful Medium Become Money?

I have opined on this previously as well and suggested that money could have started as a bi-product (ie waste) from an otherwise useful activity.

It might seem like a far-fetched suggestion but we can think about an already existing accounting system for barter such as a room full of scribes etching settlement in stone. Each transaction creates a specific waste with certain properties perhaps not found in natural rocks.

It might be a person picks it up because they wonder if they can’t make use of it or it could simply be some children that start to play games with it. Here a use case is perhaps born but the bootstrap mechanism to money is not necessarily going to be bartered price.

Even more far-fetched perhaps, imagine for every 10 settlement etchings there is 1 specially formed unit or token. Someone picks up a pile and hands them to their family. Perhaps even makes an even trade with an ally and gives them some of this unique but worthless proto-token (or even the children of the family show the other traders family the games they play and the children pass the tokens on for free since they were gathered for free etc).

The economy improves for other reason and the tallies scribed represent a higher amount. I think it’s not a stretch to say if a network of traders had this worthless token that it could be recognizable as useful for LOW value transactions.

It’s a stretch but we aren’t finished….

Satoshi’s Alchemic Magic

In that post Satoshi also gave this as a property to this medium that COULD be money (but had no other use cases):

and one special, magical property:
- can be transported over a communications channel

It seems he is referring to Bitcoin but can this then still be applied to the origins of money as a natural occurrence?

I think this is rather what money really is. I think we developed accounting systems fairly naturally and that we have great amounts of archeological evidence of this and it would be easy to argue that a civilization that had an accounting system could thrive and scale better than those that don’t (and perhaps “employ” those that don’t out of force or intelligence etc.).

I think it also would be easy to argue that having an actual money system would allow the economic network to extend perhaps further than what a single trading post could serve.

Money in this sense is like having the ability to connect otherwise unconnected economic nodes. Like a proto-communications network forming that transfers not goods or people but economic data.

And I think it is further helpful to think of an accounting system as an external memory much like our computers today serve us individually.

Then it becomes quite natural to suggest that we could simply have accidently created money as the thing that allowed us to survive.

Gold As An Accounting System

Gold has great properties for measurement in regard to weight. This could be considered an initial use case for then becoming money but I think at the same time there is missing the explanation of how or why gold was mined in the first place (it would be impossible to reason it would be useful as such without having mined it first).

Of course this leads to the suggestion that we first valued gold as a jewelry because it was shiny and in the past there would be enough surface gold to not have to expend a lot of energy to procure it.

But I think in a more ancient past, if we think of animals, we didn’t have time for such jewelry.

And so I would like a proper evolutionary explanation as to why the specific color of gold is something desirable to us.

Jewelry As An Accounting System

Here we arrive at Nick Szabo’s account of the origins of what he calls “proto money”. He writes here and in other essays about the historical observations of using jewelry as money or in other words an accounting system.

From this, and this is still citing Szabo, we can see that wearing jewelry was like carrying a wallet.

And so it is right here we have the crux of the debate of whether money must have previously come from the most price established good or whether or not it might have propagated as an extension of accounting systems that hadn’t yet evolved to have Satoshi’s magical property (“can be transported over a communications channel”).

As a side not I think shells would be an easy example of a possible not useful byproduct off a useful activity (eating). Then you have an easy explanation of the types of scarcities that could arises and how perhaps children could have picked certain ones up for game etc.

Re-Turning to Gresham’s Law

So I don’t really like the terms we have ascribed to Gresham’s observations. I think we might be confused and needed that certain narrative to not give up on what might in the future be considered a religiously held view.

I think “fiat” or non-commodity money is as a good and useful invention.

So I wish to present the argument that various interests and groups, notably including “Keynesian” economists, have sold to the public a “quasi-doctrine” which teaches, in effect, that “less is more” or that (in other words) “bad money is better than good money”. Here we can remember the classic ancient economics saying called “Gresham’s law” which was “The bad money drives out the good”. ~John Nash Ideal Money

On Gresham’s Law as a Weapon

In thinking of a civilization that uses rice as part of an accounting method that might have a monetary revolution based on a famine I think there is a corollary observation.

We can think of a society that uses a commodity money like gold as the basis of its economy and how an external economic entity might either have a natural demand for this commodity or create some form of an artificial one in order to disrupt the gold based economy.

Then there could be certain adjustments taken as a counter that would obviously deeply affect the population which is already culturally relying on the stability of the basis of its economy.

Fiat could be a great counter response in this sense I think that saves the economy from total implosion or halt (there would still be great confusion and culture shock etc).

Juice
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