Money is what the Free Market says it is

This Bitcoin screed by David Kramer should remind us to define our terms when we speak of “Free” Markets. Free refers to:

(1) Free as in “free” of serving political/economic ends
(2) Free as in “free” of being tethered to specific moral judgements/preferences and/or outcomes

This definition of “free” allows us to critically examine the remarks of David Kramer who writes:

(despite) the fact that it was voluntarily created by the marketplace, I’m afraid that those people are losing sight of how a real medium of exchange arises in a free market.

As a logical truth statement, this can be written as:

If p, then q

p=”Free Market”
q=”Gold Warehouse Receipts as medium of Exchange”

The truth statement can be rewritten:

If ~q, then ~p.

The rewritten truth statement violates my above definition of “free” since it makes a “preference for gold as a medium of exchange” a necessary condition for a free market.

Now Kramer’s truth statement is not illogical, that is it does not rest on any logical fallacy by itself. However, when presented with a counterexample, resorting to a “No true Scotsman” claim is resting an argument on top of a logical fallacy. Here, the “true Scotsmen” are only those who truly understand the Austrian rationale for gold.

Almost 4 years ago at Freedom Democrats, I posted an article that succinctly outlined the Misean position for Gold Warehouse receipts. In that same article, I outlined two other competing ideas, namely free market fiduciary money and free market fiat money. The overall point made was that money was a “coordination problem,” which thus makes it a type of coordination game. The Misean treatment affirms this because of it’s reliance on the “Misean Regression Theorem” to resolve the paradox of the “Austrian Circle” when applying a marginal utility treatment to the price of money. Coordination games typically do not have a unique equilibrium which thus introduces the problem of equilibrium selection in the case of multiple equilibria. The case of Gold Warehouse Receipts being an established convention–which would thusly terminate the coordination problem since the payoff from the conventional solution would greatly exceed other payoff equilibria–is not an empirical one.

Interestingly, in the original piece, reproduced below, I mentioned E. C. Riegel’s dictum: “money is but a medium of evidencing barter balances.” This is the economic principle underlying Bitcoin more or less. The key word here is “evidencing,” which we can substitute the more modern term, “verification.” When Kramer writes that bitcoins are arbitrarily created out of thin air, he should research the thing he is criticizing before offering up his criticism. Bitcoin money creation is tied to a “competitive market” for transaction verifications. It is not the result of an arbitrary process.

Lastly, one more note about “convention.” The “Misean Regression Theorem,” which establishes Gold as a convention, based on a regression series for a demand for money that can be traced back to a barter economy where gold emerged as a medium of exchange, also can be viewed as a progression series terminating in totalitarian fiat currency abolishing gold as a medium of exchange. And the the only thing that can undermine this state of affairs is something that likely arises out of a 21st century digital barter economy. Conventions are just that, conventions…they should never be mistaken for universal principles.


Money as a Coordination Problem. Originally published at Freedom Democrats, December 2008

tarran over at the The Liberty Papers makes the case for Free Banking. From a libertarian perspective, given that the US Central Bank these days is effectively in the business of “corporatizing” money and credit, it would seem that Free Banking should be experiencing a revival or sorts(well at least among those who take a dim view of such things as corporatization).

tarran essentially lays forth the Misean View of Money and Credit that treats the demand for cash balances(a good not to be consumed itself, but to be held to exchange for later consumption) the same as the demand for any other good, subject to the same principles of marginal utility and subjectivism. In this context, money is more or less a commodity or good, and “the Bank” is treated more or less like any other firm that rises to supply goods. However, there is an implicit “coordination problem” with the Misean view of money, one that is typically characterized by Austrians as the “Austrian Circle.” Specifically, given that money itself is not a directly consumable good, a marginal utility treatment of money presupposes some coordination when it comes to it being valued as a good in and of itself. Mises posited his “regression theorem” to assert that such coordination ultimately must germinate from a barter economy and that historically, it has been Gold that has emerged from such barter economies as that commodity that has demonstrated such utility. Thus from a Misean perspective, Gold plays a central role in any conception of “Free Banking,” and any notion that money can originate either from government edict or by some form of social compact is rejected (As a corollary of sorts, it should be noted that State Fiat Money then, to subsist, must necessarily evolve out of something originally based on a commodity such as gold).

If we take the Hayekian perspective on the fundamental role prices play in terms of economic coordination, then a necessary a priori proposition is that money itself must have some sufficient level of immunity to economic rent seeking. Otherwise, the market price system will invariably break down. Historically, it should be noted that Hayek himself more or less took for granted the existence of a central bank until the 1970s stagflation/inflation radicalized him more towards the Free Banking position. Hayek, however, was largely dismissive of the need for Gold in Free banking, viewing it as an ancient convention/superstition that could be superseded by modern day spontaneous orders.

Thus, an interesting dichotomy between the likes of Mises and Hayek when it comes to money. Of course, both Mises and Hayek were classical liberals, not anarchists, and the presumption of Free Banking in the context of the State has become a moot point. Although Mises was hostile to the notion of anarchism, the reality is that State Failure lies at the nexus of any practical application of “free-market money” these days. An interesting development of late is the growing popularity of barter-based monetary systems. In the current conditions of “tight credit,” agents may be resorting to bartering exchanges to preserve cash balances. However, if the large amounts of liquidity being injected into the financial system eventually leads to a stagflation or hyperinflation scenario, the popularity of these barter-based monetary systems would skyrocket as demand for cash would plummet.

An interesting observation is that in instances of State Failure, spontaneous alternative currencies tend to follow models suggested by E. C. Riegel rather than Mises. Riegel’s dictum that “money is but a medium of evidencing barter balances” is a subjectivist case for free-market fiat money arising from voluntary exchange. This competes with the Misean warehouse receipts version of commodity money(Gold) arising from barter exchange. No doubt, the Misean conception of warehouse receipts is rooted in history, specifically, the British tradition, but it’s debatable whether the British Tradition is really rooted in free-market, spontaneous order. In any event, the likes of David Friedman, for example, has made a compelling argument that private commodity money would likely result in fractional reserve banking. So-called “fiduciary money,” of course, is an anathema to the Misean notion of money that equates fiduciary money with either theft or fraud. However, as James Leroy Wilson notes, there’s no real case for fraud to be made as long as the notes in circulation are ultimately backed by other assets of equal value belonging to the bank. This was essentially the same point that David Friedman made with the caveat that the the value of such assets not be linked to the value of said money–for example bank corporate stock. Indeed, Friedman pointed out there would likely be little preference for banking with “limited-liability corporations,” so that in the case of failure, the assets of the investors would be fair game to satisfy depositor claims.

In the absence of the State, money is what the free market says it is. Hayek classified economics as a coordination problem, which certainly includes “money” itself. Mises may have posited his regression theorem to resolve the money coordination problem in favor of gold and warehouse receipts, but the same regression theorem technique can be applied, for example, to demonstrate that free-market fiat money can arise out of barter exchange as well. Coordination problems typically do not have unique solutions. Free market fiat money, free market fiduciary money, and free market warehouse receipts are all “solutions” to the money coordination problem. In conditions of market anarchism, where there are no legal-tender laws, an inferior solution is not going to drive out a superior solution. Clearly inferior solutions will die out on their own.

4 thoughts on “Money is what the Free Market says it is

  1. If the emotionally charged words are removed from Kramer’s screed, I think his argument can basically be summed up as saying that the use of fiat money is not a good strategy… that the intrinsic value of commodity currencies provides incentive to participate and therefore stabilizes the system (and makes it easier to establish). In the absence of this stabilizer, the system becomes a pyramid scheme — it will eventually fail, and the end result will be a transfer of wealth from the people holding the currency when it implodes to the people who set up the system in the beginning.

    That’s basically my opinion about BitCoins… but maybe I’ll be surprised and it will prove its stability. If there is any substantial difference between Kramer’s position and mine, it is only that he seems unwilling to be surprised.

    1. I think Bitcoin will survive fine if it has a competitive currency exchange market. Then the Coase Theorem may come into effect regarding initial allocation of property rights.

      Defining money in terms of transaction verification comports very well with a 21st century digital economy…much more efficient than commodity backed money.

  2. “Defining money in terms of transaction verification comports very well with a 21st century digital economy…much more efficient than commodity backed money.”

    “Efficient”? Efficiently loose in regards to intrinsic value and manipulation. Capital is not fiction and neither ought be money.

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