It’s relatively common to see the regression theorem being mentioned in economic discussion, especially when it comes to whether something actually is cash. That is awesome because the regression theorem doesn’t have anything to do with cash together with the definition of cash. Regression theorem only involves prices and is a truly direct restatement of common sense.
To be aware that the regression theorem, we must understand the biblical overview of the establishment of prices – where does price emerge? How do we understand exactly how much to sell adequate X for? The quick answer is the current price comes at preceding prices. The current price of a item stems from the price it was , a week earlier, per month, or just a year ago. The price of a good comes from precisely what the good has been worth at the past, the price evolves and changes across the innumerable interactions on the present marketplace and originates from previous prices. From the precise token, the value of cash must evolve in the past.
This objection was raised: “Monies haven’t been in existence, they increase and collapse. If price stems from the past and at certain point earlier this money wasn’t in existence, then where did the price come from at the first site? That seems like circular logic ? To have the ability to respond to this criticism, the regression theorem appeared.
To quote Rothbard from Man, Economy, and State (source ):
“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 added: “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 added Additional:
Presently the problem may be raised: Allowed there isn’t any circularity at the decision of money expenses, doesn’t the fact that the causes partially regress backward in time just push the rotten parts back further without end? If today’s prices are partly determined by yesterday’s prices, and yesterday’s by people of the day before yesterday, etc., isn’t the regression just pushed back favorably, and part of the determination of prices so left rotten? The remedy is that the regression isn’t infinite, as well as the trick into this stopping point is that the differentiation only made between conditions at a currency economy and conditions within a state of barter.
That is actually the essence of what regression theorem is – saying the definition of price isn’t round since the value of money comes in this value of the good before it was an money. Regression theorem doesn’t state anything about what makes a great a money or the qualities cash has whatsoever, just especially this definition of the value of money isn’t circular because a start is defined.
It is very important to remember that like most of evolutions, the growth of a into a currency is slow rather than instantaneous. Rothbard’s idea of a particular day is a stage for the sake of debate. The most important thing is that a ‘start’ is present, the transition onto an entire as a singular event.
Many people today say Bitcoin isn’t money since it ‘violates regression theorem’ since it wasn’t a great before it turned into cash – that misses the point of exactly what regression theorem is. From this context of all the regression theorem, the value of Bitcoin isn’t circularly defined, but rather comes from the very first transactions made. Research indicates the very first purchase of a great with BTC was 5-21-2010 if an individual named ‘Laszlo’ purchased ~$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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