Browsed byTag: Carl Menger

Cryptocurrencies and a Wider Regression Theorem – Article by Peter St. Onge

Cryptocurrencies and a Wider Regression Theorem – Article by Peter St. Onge

Peter St. Onge
December 18, 2014
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The debate whether or not cryptocurrencies are “money” has put a spotlight on the Menger-Mises Regression Theorem. As stated, the theorem posits that a non-fiat money must have had value before it became a money. Some have used currencies’ lack of antecedent value as knocking it off the money pedestal or as forcing cryptocurrencies to ignominiously piggyback on fiat currencies’ own regressions.

In a 2013 post Konrad Graf makes the excellent point that such critiques misread the Regression Theorem. In reality, Graf argues, the theorem is not a hypothesis to be tested, rather the theorem tells us that cryptocurrencies such as Bitcoin indeed had some antecedent value. At which point our task is to discover what that antecedent value was. Graf suggests several alternatives, including utility of Bitcoin as a geek toy, as art, or as social marker. Because of these non-monetary uses, Graf writes, bitcoin and the theorem do not threaten each other, but “merely gaze across the intellectual landscape at one another with knowing smiles.”

While I agree with Graf on his main point that the theorem implies cryptocurrencies did have antecedent value, I believe that both the original critique and Grafs’ response fall into a trap of misreading the theorem as requiring non-monetary and previously realized (“bought and sold”) benefits.

Money Is a Useful Good

Among Menger’s greatest contributions in his Principles is the realization that money is fundamentally a good like any other — demanded for its usefulness in enabling transactions and store of value — with an actual price dictated by its scarcity.

If money, like any other good, derives its value from the benefits it offers, it’s hard to see why the money, even those benefits, require an antecedent. Just as the internet can be valuable without a “pre-internet,” a cryptocurrency enabling anonymous, irreversible, low-regulation transactions and savings can be valuable without a precursor. [1] If there is no regression requirement for value in any other good, why does money alone bear this burden?

Must Money Have a Non-Monetary Use?

Instead, I would argue for a reading of the Regression Theorem with two important liberalizations. First, benefits provided by a money needn’t be non-monetary. That is, the benefits can reside in the good’s use as money itself — no need for geek-chic art. Second, antecedent demand needn’t have been realized — the use needn’t have actually occurred. It’s the antecedent demand, even latent, not the previous buying and selling, which counts in importing value via the Regression Theorem.

To give an example that satisfies both liberalizations, a benefit such as anonymous wire transfers is both a money-related benefit and is also a service that didn’t previously exist. In a liberalized Regression Theorem, this benefit would count as the antecedent demand giving the spark of life to a scarce cryptocurrency.

A concrete historical example of a currency offering both mainly monetary value and offering it only at moment of birth is Tang China’s paper money. Called “flying cash,” paper offered the key benefit of portability, set against its other risks compared with bullion coins (flammability, uncertain redemption). We could surely seek out non-monetary antecedent value for Tang cash — toilet paper comes to mind. But it seems a stretch to reach for artistic or hygiene uses, compared to the natural conclusion that flying cash was demanded because of its monetary benefits. The fact that demand for portable money was unrealized would simply increase paper money’s value to the unfortunate customer who lacked alternative light-weight money.

This mistaken focus on non-money-related and realized antecedent value is understandable, since even Mises seems to be mixing historical and praxeological discussion in Human Action (chapter 17, sec. 4) where Mises writes, “No good can be employed for the function of a medium of exchange which at the very beginning of its use for this purpose did not have exchange value on account of other employments.”

Here Mises seems to clearly state that Menger’s Regression Theorem requires a currency to have historically represented a commodity having non-money use. This is a natural interpretation, especially in context of Mises’s subsequent discussion of precious metals, clearly useful commodities that you can flash at parties.

But we must take care here to separate Mises’s historical generalization from the praxeological core of his statement. Because Mises has metal on his mind, he suggests the “other employments” must have been antecedent (“did not have”) and, in his subsequent discussion of metals, seems to imply the commodities should be both concrete and previously in use (realized) for non-money purposes.

Money Benefits Are as Useful as Non-Money Benefits

Again, praxeologically, none of these requirements are essential. Money benefits are as useful as non-money benefits, and a useful commodity could conceivably be created and become a medium of exchange at the same moment. So long as the commodity offers “employments” in the form of benefits to users. Cryptocurrencies’ anonymity, regulatory treatment, algorithmically fixed rate of growth, fee structure, and irreversibility of transfer are all money-related benefits, many unrealized before cryptocurrencies came along.

On this reading, and in agreement with Graf, cryptocurrencies are not at all a challenge to the Regression Theorem. They are a confirmation. At birth, cryptocurrencies offered useful features. These benefits function as “employments,” giving cryptocurrencies demand via transaction and store of-value benefits, which in turn import durable purchasing power.

Perceptions Are Important

That “seed” of demand can then be amplified by marketing — by framing the subjective benefits of the currency. Again like any other good, if individuals exert effort to communicate and frame the benefits of a cryptocurrency, then we might expect demand to increase. These individuals may be the owners of businesses that benefit from the currency, or they simply may be enthusiasts.

Now we can simply match these subjective benefits to scarcity to yield a price of a cryptocurrency. Below zero and the currency isn’t “good enough” — it’s not perceived to offer enough benefits. It’s not cool and it’s not art. Above zero and a currency is born: now Satoshi Nakamoto t-shirts are all the rage.

As technology lowers the costs of producing cryptocurrencies, broadening the Regression Theorem’s value requirement to accept novel money-related benefits opens up enormously the range of currencies that are possible in the future. It should be an exciting few decades in the world of currency innovation.

Notes

1. Cryptocurrencies benefit from a perception of anonymity, although whether or not there is actual anonymity in practice is another matter.

Peter St. Onge is an assistant professor at Taiwan’s Fengjia University College of Business. He blogs at Profits of Chaos.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Individual Empowerment through Emerging Technologies: Virtual Tools for a Better Physical World – Video by G. Stolyarov II

Individual Empowerment through Emerging Technologies: Virtual Tools for a Better Physical World – Video by G. Stolyarov II

G. Stolyarov II
November 23, 2014
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No realm of human activity in the past century has empowered and liberated the individual as efficaciously as technological advancement. Our personal, political, and economic freedoms – though limited in many respects – today allow us to achieve quality-of-life improvements and other objectives that were inconceivable even a few decades ago. Much libertarian, classical liberal, and Objectivist theory supports this insight, but in our era of increasing salience of advanced technology, this support needs to be made far more explicit and applied toward vocal advocacy of emerging, life-transforming breakthroughs that further raise the capacities of the individual. Gamification, augmented reality, and virtual worlds can play a significant role in enhancing and preserving our physical lives.

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This video is based on Mr. Stolyarov’s essay “Individual Empowerment through Emerging Technologies: Virtual Tools for a Better Physical World“.

References

Playlist: The Musical Compositions of G. Stolyarov II
– “Ayn Rand, Individualism, and the Dangers of Communitarianism” (2012) – Essay by G. Stolyarov II
– “Carl Menger, Individualism, Marginal Utility, and the Revival of Economics” (2006) – Essay by G. Stolyarov II
– “Ludwig von Mises on Profit, Loss, the Entrepreneur, and Consumer Sovereignty” (2007) – Essay by G. Stolyarov II
– “Open Badges and Proficiency-Based Education: A Path to a New Age of Enlightenment” (2013) – Essay by G. Stolyarov II
Runkeeper
Fitocracy
Fitbit
– “Minecraft” – Wikipedia
– “Oculus Rift” – Wikipedia –
– YouTube Videos of Minecraft Computers (here and here)

Individual Empowerment through Emerging Technologies: Virtual Tools for a Better Physical World – Article by G. Stolyarov II

Individual Empowerment through Emerging Technologies: Virtual Tools for a Better Physical World – Article by G. Stolyarov II

G. Stolyarov II
November 9, 2014
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No realm of human activity in the past century has empowered and liberated the individual as efficaciously as technological advancement. Our personal, political, and economic freedoms – though limited in many respects – today allow us to achieve quality-of-life improvements and other objectives that were inconceivable even a few decades ago. Much libertarian, classical liberal, and Objectivist theory supports this insight, but in our era of increasing salience of advanced technology, this support needs to be made far more explicit and applied toward vocal advocacy of emerging, life-transforming breakthroughs that further raise the capacities of the individual. Gamification, augmented reality, and virtual worlds can play a significant role in enhancing and preserving our physical lives.

I find a lot of support for technological progress, self-determination, and the triumph of the individual over the impositions of the collective in the works of Ayn Rand (as an example, see this 2012 essay of mine for a brief analysis of Randian individualism). The Austrian economists Carl Menger and Ludwig von Mises were also great exponents of individualism, and their innovations in value-theory emphasized the importance of subjective preference in the determination of prices, the work of entrepreneurs, and the effects of policy. They grounded their economic work in a deep understanding of philosophy and offered a countervailing view of the world during a time when postmodernism was gaining popularity. They explained that universal laws of economics, derived from the basic fact of human action itself, are at the root of explaining whether societies facilitate flourishing and progress, or misery and stagnation.

Were these great thinkers alive today, it would have been fascinating to observe their insights regarding the power of technology to enable the personal creation of art which was not technically feasible for an individual in prior eras to create. They would surely recognize the amazing influence of the latest generation of technological entrepreneurs on our lives and well-being – not just in the emergence of computers, the Internet, and mobile devices – but also in less-emphasized applications, such as digital art, electronic music, increasingly sophisticated and graphically immersive computer games, and tools for the “quantified self” – an increasing array of metrics for vital bodily attributes and activities. The convergence of these tools is ushering in an era of augmented reality, which rational and determined creators can harness to achieve their goals more effectively and more enjoyably.

I have seen this vast technological improvement affect my ability, for example, to compose music. In a few hours I can create a composition and hear it played back flawlessly by an electronic orchestra, whereas even a decade ago I would have needed to spend weeks internalizing melodies and variations. In order to play my compositions, I would have had to spend months practicing, even then being quite vulnerable to human error. One of my current ongoing projects is to remaster as many of my older compositions (all preserved, thankfully) as I can using the tools now available to me – enabling their flawless playback via synthetic instruments. Today, they can sound exactly as I intended them to sound when I composed them years ago. Many works have already been remastered in this way (available within this video playlist), which has enabled me to hear and to share with the world pieces which have not been in my “finger memory” for over a decade.

Numerous life-improving applications of augmented reality are emerging now and can be expected to expand during the proximate future. Many of these technologies can have strong, immediate, practical benefits in enhancing human survival and functionality within the physical world. Already, mobile applications such as Runkeeper, scoring systems like that of Fitocracy, or devices like the Fitbit allow individuals to track physical activity in a granular but convenient manner and set measurable targets for improvement. Significant additional innovation in these areas would be welcome. For instance, it would be excellent to have access to live readings of one’s vital statistics, both as a way of catching diseases early and measuring progress toward health goals. This vision is familiar to those who have encountered such functionality in virtual worlds. Players track and improve these statistics for their characters in computer games, where it proves both interesting and addictive – so why not bring this feature to our own bodies and other aspects of our lives?

Computer games – one type of virtual world – expand the esthetic and experiential possibilities of millions of people. While not fully immersive, they are far more so than their predecessors of 20 years ago. They can extend the range of human experience by enabling people to engage in actions inaccessible during the course of their daily lives – such as making major strategic decisions in business, politics, or world-building, exploring outer space, or designing and interacting with a skyscraper without the hazards of being a construction worker. (Minecraft comes to mind here as an especially versatile virtual world, which can be shaped in unique ways by the creativity of the individual. I can readily imagine a future virtual-reality game which is a more immersive successor of Minecraft, and where people could create virtual abodes, meeting places, and even technological experiments. Minecraft already has mods that allow the creation of railroads, industrial facilities, and other interesting contraptions.)

One common and highly gratifying feature of computer games that has long fascinated me is the ability to make steady, immediately rewarding progress. Any rational, principled economic or societal arrangement that promotes human flourishing should do the same. Emerging efforts at the “gamification” of reality are precisely a project of imparting these rational, principled characteristics – hopefully remedying many of the wasteful, internally contradictory, corrupt, and fallacy-ridden practices that have pervaded the pre-electronic world.

Tremendous technological, cultural, and moral progress could be achieved if this addictive quality of games were translated into the communication of sophisticated technical concepts or philosophical ideas, such as those underpinning transhumanism and indefinite life extension. If there were a way to reliably impart the appeal of games to knowledge acquisition, it would be possible to trigger a new Age of Enlightenment and a phenomenon never seen before in history: that of the masses becoming intellectuals, or at least a marked rise in intellectualism among the more technologically inclined. This aspiration relates to my article from early 2013, “Open Badges and Proficiency-Based Education: A Path to a New Age of Enlightenment” – a discussion of an open-source standard for recognizing and displaying individual achievement, which could parlay the abundance of educational resources available online into justified reward and opportunities for those who pursue them.

While some critics have expressed concern about a future where immersion in virtual worlds might distract many from the pressing problems of the physical world, I do not see this as a major threat to any but a tiny minority of people. No matter how empowering, interesting, addictive, and broadening a virtual experience might be (and, indeed, it could someday be higher-resolution and more immersive than our experience of the physical world), it is ultimately dependent on a physical infrastructure. Whoever controls the physical infrastructure, controls all of the virtual worlds on which it depends. This has been the lesson, in another context, of the recent revelations regarding sweeping surveillance of individuals by the National Security Agency in the United States and its counterparts in other Western countries. This inextricable physical grounding is a key explanation for the unfortunate fact that the Internet has not yet succeeded as a tool for widespread individual liberation. Unfortunately, its technical “backbone” is controlled by national governments and the politically connected and dependent corporations whom they can easily co-opt, resulting in an infrastructure that can be easily deployed against its users.

A future in which a majority would choose to flee entirely into a virtual existence instead of attempting to fix the many problems with our current physical existence would certainly be a dystopia. Virtual reality could be great – for learning, entertainment, communication (especially as a substitute for dangerous and hassle-ridden physical travel), and experimentation. Some aspects of virtuality – such as the reception of live statistics about the external world – could also be maintained continually, as long as they do not substitute for the signals we get through our senses but instead merely add more to those signals. However, the ideal use of virtual reality should always involve frequent returns to the physical world in order to take care of the needs of the human body and the external physical environment on which it relies. To surrender that physicality would be to surrender control to whichever entity remains involved in it – and there is no guarantee that this remaining entity (whether a human organization or an artificial intelligence) would be benevolent or respectful of the rights of the people who decide to spend virtually all of their existences in a virtual realm (pun intended).

Fortunately, the pressures and constraints of physicality, so long as they affect human well-being, are not easily wished away. We live in an objective, material reality, and it is only by systematically following objective, external laws of nature that we can reliably improve our well-being. Many of us who play computer games, spend time on online social networks, or even put on virtual-reality headsets in the coming years, will not forget these elementary facts. We will still seek food, shelter, bodily comfort, physical health, longevity, and the freedom to act according to our preferences. The more prudent and foresighted among us will use virtual tools to aid us in these goals, or to draw additional refreshment and inspiration within a broad framework of lives where these goals remain dominant.

In a certain sense, virtual worlds can illustrate some imaginative possibilities that cannot be experienced within the non-electronic tangible world – as in the possibility of constructing “castles in the air” in a game such as Minecraft, where the force of gravity often does not apply (or applies in a modified fashion). There is a limit to this, though, in the sense that any virtual world must run on physical hardware (unless there is a virtual machine inside a virtual world – but this would only place one or more layers of virtuality until one reaches the physical hardware and its limitations). A virtual world can reveal essential insights which are obscured by the complexity of everyday life, but one would still remain limited by the raw computing power of the hardware that instantiates the virtual world. In a sense, the underlying physical hardware will always remain more powerful than anything possible within the virtual world, because part of the physical hardware’s resources are expended on creating the virtual world and maintaining it; only some fraction remains for experimentation. People have, for instance, even built functioning computers inside Minecraft (see examples here and here). However, these computers are nowhere close to as powerful or flexible as the computers on which they were designed. Still, they are interesting in other ways and may employ designs that would not work in the external physical world for various reasons.

Most importantly, the fruits of electronic technologies and virtual worlds can be harnessed to reduce the physical dangers to our lives. From telecommuting (which can reduce in frequency the risks involved with physical business travel) to autonomous vehicles (which can render any such travel devoid of the accidents caused by human error), the fruits of augmented reality can be deployed to fix the previously intractable perils of more “traditional” infrastructure and modes of interaction. Millions of lives can be saved in the coming decades because a few generations of bright minds have devoted themselves to tinkering with virtuality and its applications.

The great task in the coming years for libertarians, individualists, technoprogressives, transhumanists, and others who seek a brighter future will be to find increasingly creative and sophisticated applications for the emerging array of tools and possibilities that electronic technologies and virtual worlds make available. This new world of augmented reality is still very much a Mengerian and a Misesian one: human action is still at the core of all meaningful undertakings and accomplishments. Human will and human choice still need to be exerted – perhaps now more so than ever before – while being guided by human reason and intellect toward furthering longer, happier lives characterized by abundance, justice, peace, and progress.

When Zero’s Too High: Time Preference versus Central Bankers – Article by Douglas French

When Zero’s Too High: Time Preference versus Central Bankers – Article by Douglas French

Douglas French
July 20, 2014
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Central banking has taken interest rate reduction to its absurd conclusion. If observers thought the European Central Bank (ECB) had run out of room by holding its deposit rate at zero, Mario Draghi proved he is creative, cutting the ECB’s deposit rate to minus 0.10 percent, making it the first major central bank to institute a negative rate.

Can a central-bank edict force present goods to no longer have a premium over future goods?

Armed with high-powered math and models dancing in their heads, modern central bankers believe they are only limited by their imaginations. In a 2009 article for The New York Times, Harvard economist and former adviser to President George W. Bush, N. Gregory Mankiw, wrote, “Early mathematicians thought that the idea of negative numbers was absurd. Today, these numbers are commonplace.”

While this sounds clever, Ludwig von Mises undid Mankiw’s analogy long ago. “If he were not to prefer satisfaction in a nearer period of the future to that in a remote period,” Mises wrote of the individual, “he would never consume and enjoy.”

Carl Menger explained that it is “deeply imbedded in human nature” to have present desires satisfied over future desires. And long before Menger, A. R. J. Turgot wrote of the premium of present money over future money, “Is not this difference well known, and is not the commonplace proverb, ‘a bird in the hand is better than two in the bush,’ a simple expression of this notoriety?”

Central bankers can set a certain interest rate, but human nature cannot be eased away, quantitatively or otherwise. But the godfather of all central bankers, John Maynard Keynes, ignored time preference and focused on liquidity preference. He believed it was investments that yielded returns, and wrote, “Why should anyone outside a lunatic asylum wish to use money as a store of wealth?”

If liquidity preference determined the rate of interest, rates would be lowest during a recovery, and at the peak of booms, with confidence high, everyone would be seeking to trade their liquidity for investments in things. “But it is precisely in a recovery and at the peak of a boom that short-term interest rates are highest,” Henry Hazlitt explained.

Keynes believed that those who held cash for the speculative motive were wicked and central bankers must stop this evil. However, as Hazlitt explained in The Failure of the “New Economics,” holding cash balances “is usually most indulged in after a boom has cracked. The best way to prevent it is not to have a Monetary Authority so manipulate things as to force the purchase of investments or of goods, but to prevent an inflationary boom in the first place.”

Keynesian central bankers leave time out of their calculus. While they think they are lending money, they are really lending time. Borrowers purchase the use of time. Hazlitt reminds us that the old word for interest was usury, “etymologically more descriptive than its modern substitute.”

And as Mises explained above, time can’t have a negative value, which is what a negative interest rate implies.

Borrowers pay interest in order to buy present assets. Most importantly, this ratio is outside the reach of the monetary authorities. It is determined subjectively by the actions of millions of market participants.

Deep down, Mankiw must recognize this, writing, “The problem with negative interest rates, however, is quickly apparent: nobody would lend on those terms. Rather than giving your money to a borrower who promises a negative return, it would be better to stick the cash in your mattress. Because holding money promises a return of exactly zero, lenders cannot offer less.”

But still, he approvingly cites German economist Silvio Gesell’s argument for a tax on holding money, an idea Keynes himself approved of.

Keynesian central bankers are now central planners maintaining the unshakable belief that low interest rates put people back to work and solve every economic woe. “But in reality,” writes Robert Murphy, “interest rates coordinate production and consumption decisions over time. They do a lot more than simply regulate how much people spend in the present.”

Murphy points out that low rates stimulate some sectors more than others. Lower rates generally boost housing and car sales, for instance, while not doing much for consumer goods.

More than half a decade of zero interest rates has not lifted anyone from poverty or created any jobs—it has simply caused more malinvestment. It is impossible for the monetary authorities to dictate the proper interest rate, because interest rates determined by command and control bear no relation to the collective time preference of economic actors. The result of central bank intervention can only be distortions and chaos.

Draghi and Mankiw don’t seem to understand what interest is or how the rate of interest is determined. While it’s bad when academics promote their thought experiments, the foolish turns tragic when policymakers use the power of government to act on these experiments.

Douglas E. French is senior editor of the Laissez Faire Club and the author of Early Speculative Bubbles and Increases in the Supply of Money, written under the direction of Murray Rothbard at UNLV, and The Failure of Common Knowledge, which takes on many common economic fallacies.