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Brian Tockey: Bitcoin, Regression Theorem, and Defining Money

Brian Tockey: Bitcoin, Regression Theorem, and Defining Money

Here an objection was raised: “Monies have not always been in existence, they rise and fall. If price comes from the past and at some point in the past this money was not in existence, then where did the price come from in the first place? That certainly sounds like circular logic to me? In order to respond to this criticism, the regression theorem arose. To quote Rothbard from Man, Economy, and State (source): “To determine the price of a good, we analyze the market ­demand schedule for the good; this, in turn, depends on the in­dividual demand schedules; these in their turn are determined by the individuals’ value rankings of units of the good and units of money as given by the various alternative uses of money; yet the latter alternatives depend in turn on given prices of the other goods,” 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 note

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