Carl Menger and Ludwig Von Mises, the grandfathers of Austrian economics arrived at the logical conclusion that the value of money is derived not from government decrees, but by markets. As uninspired as this conclusion may seem, it was groundbreaking for its time and shook the foundations of the economic orthodoxy. Money is the most commonly used medium of exchange within a given economy. The crucial trait to be recognized is that money is a transfer of value. To serve in that function, a commodity’s value must logically be predicated on something based in reality. Typically, the value of money is based on its saleability from yesterday, the day before that, and so on. This however, presents a contradiction of infinite regress. In order to solve this problem, commodity money must be traced to its origin. This is what Mises coined as the “regression theorem.”
So how does money originate? As explained by Menger’s earlier work and Mises’ regression theorem: within a market, money will spontaneously arise as a solution to the double coincidence of wants. The coincidence of wants describes the phenomena of “un-saleability” for a given commodity. In short, your ability to barter with a commodity is dependent on finding a buyer who desires the same commodity you have for trade. If you have eggs and want milk, you must find somebody with milk who happens to want eggs. Over time, in any particular market, people will begin to engage in indirect trade of the more saleable commodities in a geographic area, in an effort to facilitate future trades. Through these transactions, the market will eventually settle on a somewhat stable price for a specific commodity. With a proven track record of these transactions, a commodity used as a medium of exchange will eventually be recognized as money. Historically, precious metals such as silver and gold have filled this role beautifully. They are quintessential commodity monies throughout many cultures in all of recorded history.
Bitcoin violates the regression theorem in much the same way that nanostructured Lithium-Ion batteries “violate” early understandings of electrochemistry. They are both improvements on the previous limits of human experience and knowledge. There is no shame in a theory being supplanted. It is in fact, the telltale mark of advancement. Further, simply because a new technology introduces fresh understanding does not always invalidate the previous understandings. In the physics of archery, elastic potential energy is transferred to an arrow via the bowstring. While that model is perfectly valid, it provides little insight for describing the technological advancements of stored chemical energy contained in ammunition for a gun or the fuel tank of a rocket. With these examples in mind, perhaps the time has come to stop using 19th century theories to describe 21st century technology.
With this understanding, can Bitcoin ever be commodity money? In short, no. Since Bitcoin is not a commodity, it can by definition, never serve as commodity money. This idea however seems a bit shortsighted. It is an egregious appeal to antiquity to assume that since Mises’ regression theorem proves that Bitcoin is not commodity money, that Bitcoin can never serve as money. Austrian economic doctrine aside, there are already alternatives to commodity money. Albeit an utter failure, fiat money provides a perfect example of a different iteration of money. It may be time to start rethinking our questions. Perhaps a more relevant inquiry is, can Bitcoin replace commodity money?
Surely, horse farmers and coachbuilders at the dawn of the automotive age knew better than to ask if automobiles were metal horses. If they didn’t know it then, they certainly do now. It did not matter that the automobile was so different in form from its predecessors in transportation. All that mattered was that it could perform the same functions more efficiently. We are at the cutting edge of a dawning era. Terminology is being outpaced by technology. It will be the job of future economists to try and decipher the crypto-rush and mint all the fresh phrases to express these new phenomena. For now though, the pop economists and Bitcoin detractors can argue semantics until they are blue in the face. In the meantime, crypto currencies and related services will continue their headlong plunge into uncharted economic territory. In the end, it may not matter what questions were asked. Bitcoin will go where market demand and software engineers lead it, regardless of what appeals to common practice we make surrounding its legitimacy as commodity money.
The economic landscape of tomorrow is being terraformed by the crypto-builders of today. Just as horse farmers and coachbuilders had to adapt to the advent of the automobile, so too will economists have to adjust to this new reality of crypto-currencies. Perhaps it’s time to rethink our economic vernacular and herald the opportunity for new understanding. As always, history will have the last word. But where electronic money is concerned, history is still being written.