The question amongst these AE enthusiasts boils down to the question, "can a medium of exchange, which has no industrial value, become near-universally accepted?" My answer is a qualified no with respect to Bitcion.
The Origin of Money
For those unfamiliar to what I am referring, the question is made in reference to Mises's Regression Theorem, with which Mises answered the question, "why do people accept money in exchange for goods and services?"The Regression Theorem holds that the reason people value money presently is because (1) they expect money to be exchangeable for goods and services in the future, because (2) they remember that the money was exchangeable for goods and services in the past. So far, the theory has a seemingly infinite regress: If X is money, because it it was exchangeable in the past, before which it was still further exchangeable.
To end the infinite regress, Mises points to Menger's theory of the origin of money. Essentially, gold was valued in its own right just as other goods were valued in their own right. That is, when barter was common and indirect exchange uncommon, gold was traded like any other good. Whatever usefulness that gold had in the eyes of the buyers of gold are not necessarily important for this, but it is sufficient to say that gold had such use value or else gold would not have become a money. (inb4 someone asks about the State's role in what was chosen as money: I answer that later.)
Thus, gold, having initially not been a money (b/c there was at one point no money), but exchanged as a good, demonstrates that gold had non-monetary value. Such value is called industrial value by Mises.
The chemical properties of gold made it particularly conducive to being used as money. Thus, assuming the State had no hand in money initially, gold became money because those in the market began near-universally using it in exchange until nearly everything was priced in terms of units of gold.
Further explanation of the origin of money lies in the efficiency of indirect exchange compared to barter, but we needn't go over that.
Two Answers to the Question
Back to our original question, "can a medium of exchange, which has no industrial value, become near-universally accepted?" There are two answers to this question, one of which I have alluded to earlier:- Yes, because money nowadays, such as the Euro and the dollar, have no industrial value, but were enforced as money by States.
- No, because money must have some previous value in exchange for it to be presently valued in exchange.
First Answer to the Question - Taxes and Industrial Value
It is indeed odd that US Dollars are treated as money. Hold on, are they even universally-accepted? It is one thing for a secluded island community to use something as money, but it is entirely different for a modern nation in the context of global, international trade to use something as money.
In the former case, the "near-universal" is accurate, because that economy is not affected by any other economic activities elsewhere in the world. However, the US economy is very much affected by economic activities elsewhere in the world, especially because of international trade.
The concept of trade imbalance is brought up only because many economists treat the economic activities in the arbitrary geographic area known as the US as distinct from, say, economic activities further north in what is called Canada.
In the former case, the "near-universal" is accurate, because that economy is not affected by any other economic activities elsewhere in the world. However, the US economy is very much affected by economic activities elsewhere in the world, especially because of international trade.
The concept of trade imbalance is brought up only because many economists treat the economic activities in the arbitrary geographic area known as the US as distinct from, say, economic activities further north in what is called Canada.
We have another question, "is there even any real distinction between economic activity that takes place in the US and economic activity that takes place in Canada?" The answer is, yes, because of taxation. See, you cannot pay taxes in the US with Canadian dollars. Because exchanging Canadian dollars for US dollars is not free, it is cheaper for tax-payers in the US to exchange in US dollars.
Thus, for economic activity in the US, there is a positive benefit to using US dollars for indirect exchange. But, almost everyone treats US dollars as money, and not merely a medium of exchange, because almost everyone accepts US dollars in exchange for good and services. Therefore, the US dollar is money, at least in the arbitrary geographic area called the US, because of taxes.
Thus, for economic activity in the US, there is a positive benefit to using US dollars for indirect exchange. But, almost everyone treats US dollars as money, and not merely a medium of exchange, because almost everyone accepts US dollars in exchange for good and services. Therefore, the US dollar is money, at least in the arbitrary geographic area called the US, because of taxes.
Thus, we seem to have answered this new question with a yes: economic activity in the US is distinct from economic activity in Canada, because each State enforces taxes in a different medium of exchange than the other. Thus, the present money in the US is distinct from the present money in Canada. But that is already obvious without any critical thought.
The reason I bring it up, is because it brings into question whether or not the US dollar and the Canadian dollar are both near-universally accepted. How can two things be near-universally accepted for the same function?
One must remember the tax issue: Canadian dollars are useful in Canada precisely because they are valuable as payment of taxes, and are not valuable in the same way in the US. Thus, the origin of the present mediums of exchange in the US and in Canada are that of a non-market origin.
To put it another way, money as it presently exists, at least in the US and Canada, do not seem fit into Mises's Regression Theorem. For that theorem requires that the money have origins in voluntary exchange. Because taxation is a non-voluntary exchange (you pay or the State puts you to jail), the Regression Theorem doesn't apply. Or does it? I answer that later. Let's address something else right quick.
Some clever individuals may say, "the reason we accept any money at all is because gold was universally accepted, and fiduciary media eventually popped up in order to make trade even easier by being even more indirect." Even more clever individuals would say, "we accept fiat money now because it was previously exchangeable for gold, which had its monetary origins in voluntary exchange." The former statement is flawed, because it only addresses voluntarily accepted fiduciary media. The latter is more accurate to reality, because it is on topic: it at least provides some semblance of an explanation as to why present fiat money is used as money.
However, the latter statement is incorrect, because it leaves out the fact that the only reason people were exchanging their gold for fiat money is the fact that they had to pay taxes in US dollars. People would have continued using fiduciary media and/or gold, if only they didn't have to pay taxes.
As is the case with exchange rates between US and Canadian dollars, so the exchange rate between a fiat currency and the fiduciary media would make it prohibitively expensive to deal in anything other currency than the fiat currency. Thus, we have an explanation as to why fiat currencies are treated as money.
Some time ago, I came up with a saying, "coercion distorts incentives," in order to summarize the effects of coercion, but also violence in general, on human behavior. I mention this in passing, because it is important to recognize that while State intervention in monetary affairs (e.g. requiring that taxes be payed in the State-created currency) does leave room for the market to function, that function is necessarily limited as a result of that coercive intervention.
As demonstrated in the preceding paragraph, the origins of the present money regime in the US is not a result of voluntary exchanges, but of coercion, but also some amount of real violence. As soon as coercion or violence becomes involved, humans change their behavior in order to avoid as much of the negative externalities that they are likely to experience.
In the case of money, people switched to the State-sanctioned currency because those people wanted to avoid the costs of non-payment of taxes and also because those people wanted to avoid the costs associated with paying exchange rates between market and State currencies. But, does the Regression Theorem has nothing to say about this?
Where is the industrial value of US Dollars? It lies in avoiding jail time. Yes, I am saying that US Dollars became money because the are useful. Yes, I am saying that US dollars have industrial value. Absolutely Scandalous! I should be treated as a twat of unimaginable proportions for not agreeing with the PC position that money is useless! Meh.
The reason I bring it up, is because it brings into question whether or not the US dollar and the Canadian dollar are both near-universally accepted. How can two things be near-universally accepted for the same function?
One must remember the tax issue: Canadian dollars are useful in Canada precisely because they are valuable as payment of taxes, and are not valuable in the same way in the US. Thus, the origin of the present mediums of exchange in the US and in Canada are that of a non-market origin.
To put it another way, money as it presently exists, at least in the US and Canada, do not seem fit into Mises's Regression Theorem. For that theorem requires that the money have origins in voluntary exchange. Because taxation is a non-voluntary exchange (you pay or the State puts you to jail), the Regression Theorem doesn't apply. Or does it? I answer that later. Let's address something else right quick.
Some clever individuals may say, "the reason we accept any money at all is because gold was universally accepted, and fiduciary media eventually popped up in order to make trade even easier by being even more indirect." Even more clever individuals would say, "we accept fiat money now because it was previously exchangeable for gold, which had its monetary origins in voluntary exchange." The former statement is flawed, because it only addresses voluntarily accepted fiduciary media. The latter is more accurate to reality, because it is on topic: it at least provides some semblance of an explanation as to why present fiat money is used as money.
However, the latter statement is incorrect, because it leaves out the fact that the only reason people were exchanging their gold for fiat money is the fact that they had to pay taxes in US dollars. People would have continued using fiduciary media and/or gold, if only they didn't have to pay taxes.
As is the case with exchange rates between US and Canadian dollars, so the exchange rate between a fiat currency and the fiduciary media would make it prohibitively expensive to deal in anything other currency than the fiat currency. Thus, we have an explanation as to why fiat currencies are treated as money.
Some time ago, I came up with a saying, "coercion distorts incentives," in order to summarize the effects of coercion, but also violence in general, on human behavior. I mention this in passing, because it is important to recognize that while State intervention in monetary affairs (e.g. requiring that taxes be payed in the State-created currency) does leave room for the market to function, that function is necessarily limited as a result of that coercive intervention.
As demonstrated in the preceding paragraph, the origins of the present money regime in the US is not a result of voluntary exchanges, but of coercion, but also some amount of real violence. As soon as coercion or violence becomes involved, humans change their behavior in order to avoid as much of the negative externalities that they are likely to experience.
In the case of money, people switched to the State-sanctioned currency because those people wanted to avoid the costs of non-payment of taxes and also because those people wanted to avoid the costs associated with paying exchange rates between market and State currencies. But, does the Regression Theorem has nothing to say about this?
Where is the industrial value of US Dollars? It lies in avoiding jail time. Yes, I am saying that US Dollars became money because the are useful. Yes, I am saying that US dollars have industrial value. Absolutely Scandalous! I should be treated as a twat of unimaginable proportions for not agreeing with the PC position that money is useless! Meh.
Second Answer to the Original Question - Taxes again
The second answer does not contradict the first answer, because, as stated above, US dollars are useful. Its industrial value was, to begin with, the avoidance of jail time; it remains so today for those living in or working in the US. Thus, this second answer is better phrased with "yes" instead of "no" at the beginning.
Further, the first answer is better phrased, "yes, because, while US dollars have no industrial value outside of the US tax regime, US dollars have a definite industrial value in payment of taxes in order to avoid jail time in the US." Thus, both original answers are half-true, but half-false. The first answer was right to include mention of the state regarding the present monetary regime, whereas the second answer was right to mention industrial value as necessary for money. Each failed to assume the industrial value of fiat money.
What About Bitcoin as Money? - Taxes, they're everywhere!
While Bitcoin is presently a medium of exchange because it is used for some amounts of indirect exchange, it must be made clear that Bitcoin is not money, because it is so sparsely accepted as a medium of exchange.
While it is rightly debatable as to how many people must exchange with Bitcoin in order to make it money, what is not debatable is that Bitcoin cannot presently be used to pay taxes. (I would be surprised if, in the future, any State accepted Bitcoins for payment of taxes; the arbitrage capabilities would be enormously hilarious.) Thus, State-sanctioned moneys, like the US dollar, will continue to have greater industrial value than Bitcoins. Coercion distorts incentives.
Even if Bitcoin had a greater industrial value in a free market, we have no free market. We have already seen demonstrated that the State interferes with the choice of money through taxation; whereas gold or even Bitcoin might be chosen as money, the US dollar is chosen, because you can't pay taxes in gold or Bitcoins. (Technically you can pay in gold, but the IRS treats an ounce of gold as worth significantly less than what is available on the market, thus an arbitrary exchange rate ruins any prospect of gold having greater industrial value than US dollars.)
Better Terms for Value
While the terms "industrial value" and "monetary value" are somewhat helpful, I think we would benefit from using more precise terms to describe the different concepts of value. I propose Direct Value and Indirect Value. (I am not sure if I am origin in this proposition.)
Direct Value equates to industrial value or use value, whereas Indirect Value equates to monetary value. This direct vs indirect value paradigm is more obviously related to the concept of direct vs indirect exchange. Thus, we can better recognize that indirect exchange results from immediate indirect valuation, whereas direct exchange results from direct valuation. (The reason for indirect exchange is the expectation that direct exchange will be possible in the future. See below for an explanation.) This follows from the axiom that an exchange occurs because the post-exchange situation is desired greater than the pre-exchange situation.
Note that I am using direct exchange seemingly loosely: I use it to mean any exchange of one good for another good. While that seems like a loose usage, it is in fact not. For instance, I am treating the exchange that takes place when you consume gasoline to drive somewhere as direct exchange; you would be exchanging the good of X units of gasoline for the good of travelling to a particular location.
Here's a diagram: (Exchange(Trade)). Trade is a subset of exchange, especially in praxeological terms, because trade is necessarily inter-personal, whereas exchange includes intra-personal and inter-personal changes of situation as the result of action. Thus, the above example would qualify as an intra-personal, direct exchange.
Conclusion
With these better terms, I think we can more clearly state where Bitcoin fits in the grand monetary scheme of things. US dollars have greater direct value than Bitcoins because you cannot pay taxes with Bitcoins. However, it is debatable as to whether or not Bitcoin would have greater direct value on a free market. Honestly, I don't know.
Thus, my answer to the original question is "no, because direct value comes before indirect value." I will have to save a direct explanation of that answer for later, because I feel that this post is long enough as it is.
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As always, please discuss this in the comments. I was able to write the above only because other people have already been commenting on the topic. More comments = I learn more.
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