It’s relatively common to observe that the regression theorem being cited in economic debate, particularly in regards to whether or not something really is cash. This is astonishing since the regression theorem has nothing to do with cash along with the definition of cash. Regression theorem only entails costs and is really a direct restatement of common sense.
To know that the regression theorem, we have to comprehend the biblical outline of the institution of costs – in which does price come out? How can we know just how much to sell decent X for? The fast answer is that the present price comes in previous rates. The present price of a product stems in the price it had been , a week before, per month, or even a year past. The price of a great comes from exactly what the great was worth at that the past, the price evolves and changes throughout the countless interactions on the current market and originates from past rates. By the exact token, the value of cash has to also evolve in yesteryear.
This objection was raised: “Monies haven’t been in life, they rise and collapse. If price stems in the past and in some stage previously this money wasn’t in life, then where did the price come from in the first location? That sounds like circular logic ? To be able to react to the criticism, the regression theorem appeared.
To estimate Rothbard out of Man, Economy, and State (origin ):
“To ascertain that the price of a great, we examine its market demand schedule for the great; this, then, is dependent upon the individual requirement schedules; those in their turn have been dependent on the people’ value positions of components of the great and components of cash according to the many other uses of cash; nonetheless the latter options depend on turn on specified costs of the other products,” Rothbard wrote. “A hypothetical demand for eggs must assume as given some money price for butter, clothes, etc. But how, then, can value scales and utilities be used to explain the formation of money prices, when these value scales and utilities themselves depend upon the existence of money prices?”
Rothbard included: “The solution of this crucial problem of circularity has been provided by Professor Ludwig von Mises, in his notable theory of the money regression. The theory of money regression may be explained by examining the period of time that is being considered in each part of our analysis. Let us define a “day? as the period of time just sufficient to determine the market prices of every good in the society.”
“On day X, then, the money price of each good is determined by the interactions of the supply and demand schedules of money and the good by the buyers and sellers on that day. Each buyer and seller ranks money and the given good in accordance with the relative marginal utility of the two to him. Therefore, a money price at the end of day Xis 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,” Rothbard’s Man, Economy, and State essay notes.
Rothbard additional added:
Currently the issue may be increased: Granted there is not any circularity in the conclusion of money costs, doesn’t the very fact that the triggers partly regress backward in time only push the rotten components back farther without end? If today’s costs are partially determined by yesterday’s costs, and yesterday’s by people of this day before yesterday, etc., isn’t the regression only pushed back favorably, and portion of their determination of costs thus left rotten? The solution is that the regression isn’t infinite, and also the hint to the stopping point is that the distinction only made between conditions in a money economy and states in a state of barter.
This is the very essence of what regression theorem is – stating that the definition of price is not circular because the value of currency comes from the value of the good before it was a currency. Regression theorem doesn’t say anything about what makes a good a currency or the qualities money has at all, only specifically that the definition of the value of currency is not circular because a beginning is specified.
It is important to note that like all evolutions, the evolution of a good into a money is gradual and not instant. Rothbard’s concept of a specific day is a point for the sake of argument. What is important is that a ‘start’ exists, the transition on a whole as a singular event.
Some people say Bitcoin isn’t money because it ‘violates regression theorem’ because it was not a good before it became money – this misses the point of what regression theorem is. In the context of the regression theorem, the value of Bitcoin is not circularly defined, but instead comes from the first transactions made. Research shows the first purchase of a good with BTC was 5-21-2010 when a user named ‘Laszlo’ bought ~$25 worth of pizza for 10,000 BTC.
Here illustrates just how much evolution actually the price goes through – a little over three years and the value of Bitcoin evolved from initial transaction, of $0.0025 USD/BTC to the current (as of this post) rate of [over $200] USD/BTC. Since a definite beginning is apparent, there is no circularity by defining Bitcoin’s value in terms of previous values. Whether or not Bitcoin is money is completely outside the scope of the regression theorem.
The concept of the regression theorem can be expanded into completely unrelated topics. One common phrase that comes to mind is the chicken and the egg. Where do chickens come from? Eggs. Where do eggs come from? Chickens. This circular definition is illogical and therefore the definition of chickens is flawed? Of course not. We know that at some point, a non-chicken laid a chicken egg. We know that chickens originally came from the first chicken egg laid by a non-chicken egg. By defining exactly where chickens and eggs started from, we have avoided the circularity in the definition, it’s the “regression theorem of chickens?.
This is the ‘common sense’ aspect of the regression theorem: definitions that sound circular are only circular if no beginning point is defined. Once a beginning point is evident, any accusation of circularity becomes completely invalid.
The regression theorem in the context of Austrian Economics is most certainly important to specifically counter-arguments that critics bring up, but care must be exercised to not apply it outside of its intended scope to avoid misunderstanding, misrepresentation, and false conclusions.
What do you think about Brian Tockey’s “Bitcoin, Regression Theorem, and Defining Money” essay? Let us know what you think in the comments section below.
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