A short while ago, I made a post explaining the contradictions of Smiling Dave. It didn’t take long and Smiling Dave responded. Or at least he seems to think that he responded. Regrettably, his reply fails to address the points that I made in a depth I consider sufficient. He concentrated on portraying Bitcoin in a negative light rather than investigating the issues. He complained that he is “besmirched and ridiculed” and that he’s being “attacked”.
I would like to address his reply. As the question of Bitcoin is not entirely unrelated to the issues, I will also involve Bitcoin in my response.

Trade between two non-consumption goods

According to Smiling Dave, a trade between two non-consumption goods is:

It’s a direct exchange of a peso for a bitcoin [or for a dollar]. It’s not indirect exchange, because the peso was directly exchanged for the bitcoin [or the dollar], with no intermediary.

So it is a direct exchange then? Mises defines direct exchange in Theory of Money and Credit as following:

Suppose that A and B exchange with each other a number of units of the commodities m and n. A acquires the commodity n because of the use-value that it has for him. He intends to consume it. The same is true of B, who acquires the commodity m for his immediate use. This is a case of direct exchange. [emphasis added]

Mises makes it clear that direct exchange involves both parties to the trade to consume the respective goods of the counterparty. Clearly, this is not the case between peso, Bitcoin or a dollar (only in very rare circumstances, e.g. numismatics). So Mises disagrees with Dave.

In Theory of Money and Credit, Mises differentiates between direct exchange and indirect exchange:

Indirect exchange is distinguished from direct exchange according as a medium is involved or not.

Clearly, in a forex trade, a medium of exchange is involved, so it can’t be a direct exchange. Dave argues that the intended purpose of the definition was only for one medium of exchange and does not apply to situations where multiple media of exchange are involved. So that now leaves him with the issue of simultaneously ignoring such transactions, and classifying them as direct exchange, thus contradicting himself. Furthermore, in Human Action Mises writes that:

Interpersonal exchange is called indirect exchange if, between the commodities and services the reciprocal exchange of which is the ultimate end of exchanging, one or several media of exchange are interposed. [emphasis added]

Mises here makes the same argument as I made earlier, that multi-stage exchange using multiple media of exchange is also indirect exchange. Furthemore, the use of phrase “is called” indicates that this is a definition. While Mises’ earlier definition from Theory of Money and Credit leaves some room open for interpretation, in Human Action he closes this gap and presents a definition that contradicts Dave’s. Whereas Dave only provided the choices of ignoring such exchanges or classifying them as direct exchange, Mises classifies them as indirect exchange.

Non-money medium of exchange

Smiling Dave finally did what I asked him and provided an example of a non-money medium of exchange:

Non money medium of exchange: cigarettes in a prison. You can get pretty much everything the prison community has to offer for cigarettes.

Unfortunately, this is fuzzy. Assuming his assumption (“you can get pretty much everything…”) is correct, then the conclusion that most Austrians would probably make is not merely that cigarettes are a medium of exchange, but they are money. If cash circulates alongside cigarettes, then both are money (even though some purists such as Hoppe might disagree and argue that in that case the prison is still in a state of partial barter and money does not exist).
Dave continues:

If 30% of the inmates are cigarette haters, then cigarettes are not yet money. What exact number is the make or break magic number of haters for cigarettes to be or not to be money? Mises says it’s not clear, meaning not known, meaning debatable.

But Dave was earlier adamant that a medium of exchange must be accepted by the whole community. So which is it now? If I had to extract his actual definition, it appears that it would be that

  1. a medium of exchange must be accepted “for anything and everything”
  2. money must be also be accepted “by everyone”

But this does not correspond to the distinction made by Mises. I don’t know of any reference by any Austrian who claims that “acceptance for anything and everything” is a defining factor of a medium of exchange. The issue of the definition of indirect exchange mentioned in the previous section emphasises the problem. Multihoming with forex markets makes it possible to use media of exchange indirectly even though the buyer might use a medium of exchange that the seller does not accept. Due to multihoming, I can use, for example, a debit card denominated in euros to buy things from merchants that only accept dollars. Similarly, okpay allows their debit cards to be populated with Bitcoin, thus if considering multihoming, it is already possible to buy almost anything anywhere with Bitcoin.

The requirement of being accepted “for anything and everything” appears to be a pure fabrication of Dave, so I kindly ask him to provide a reference.

In addition to that, I expressed a wish if Dave could provide not only an example of a medium of exchange, but of one that he considers sustainable. With respect to cigarettes in prisons, I found this article from last year:

Though the 2004 ban on smoking in federal prisons has rendered cigarettes virtually worthless as a parallel currency. They’ve largely been replaced by stamps in that capacity.

It’s not that important, I just thought I’d mention it for the sake of completeness.

Classes of goods

Dave writes:

There is a fourth class Mises didn’t bother to mention, because it usually has no influence on an economy. I call this class “Stuff Only Fools and Idiots will Bother With.” No offense. Bitcoin is right in there, at the head of the class.

While I can’t find a proper quote by Mises, I found this argument by Rothbard:

It is clear that the things that must be exchanged are goods, which will be useful to the receiving party.

Rothbard therefore affirms that if an exchange occurs, that is a proof that the underlying “things” are goods. He explains the conditions for a good in a way that is practically the same as Menger (scarcity, utility, knowledge and control). Which of these utilities does Bitcoin not fulfill? Smiling Dave does not say.

Furthermore, Dave claims that Bitcoin “has no influence on an economy”. But this is contradicted by empirical data showing that there are profitable businesses based on Bitcoin. So at best, Dave can say that it is small enough to be ignored. But this again is an arbitrary judgement, with no discernible reasoning or references behind the it. I do not recall any of the Austrian scholars arguing that if a good has a negligible effect on the economy, it should be ignored.

Dave also proposes a challenge for me:

How would he classify the invisible non existent clothing the Emperor paid good money for in the classic story “The Emperor’s new Clothes”, by H. C. Anderson? Wherever he puts those, bitcoin goes right with them.

Coincidentally, I analysed this question in an unpublished draft for my thesis. I propose a fourth class of goods, immaterial goods, as there are such goods that do not conform to the definition of any of the three categories. I define immaterial goods as goods that even not consumed in the physical sense or exchanged, alter our perception of value of goods. The emperor’s clothes fit exactly into this category: he “used” them, and this altered the value of his reputation (which is coincidentally also an immaterial good).

However, one thing that is important is that a good can belong to more than one category, depending on the context. Gold, for example, can simultaneously be a consumer good and a medium of exchange. Similarly, Bitcoin can be simultaneously an immaterial good and a medium of exchange, and one possibility of phrasing the regression theorem with respect to Bitcoin is that before Bitcoin was a medium of exchange, it was an immaterial good. But I’ve already now deviated too much from the flow of the debate. Hopefully at least this demonstrates that unlike Smiling Dave, I do not dodge questions, rather confront them.

Collapse of Bitcoin

Bitcoin will collapse the same way the Ithaca Hour and all the other phony moneys through the years collapsed.

This is a complete non-answer. For starters, Dave argued that Ithaca Hours was a medium of exchange, whereas he argues that Bitcoin cannot become a medium of exchange. Why is it analogous then? Second of all, he does not address my argument (that the proper analogy would be that demand, rather than price, of Bitcoin, would collapse). Last but not least, he did not explain why the demand would sink.

As I tried to explain before (and go into more detail about this in my master’s thesis), the demand for a complementary currency is driven by inflation. But as all Austrians know (the best example of this being the Austrian Business Cycle Theory), the increase in demand created by inflation is temporary and must always in the end return to equilibrium. So long term, the only source of sustainability they have is ideology, and that might or might not work well. Unlike the state, complementary currencies can’t rely on force, so this factor also falls away.

However, Bitcoin has none of this. The demand for Bitcoin is driven by a reduction of transaction costs. There is nothing unsustainable about a reduction of transaction costs. It can go on forever, or at least until a better contender appears. Which is this better contender? Dave does not say.


Smiling Dave seems to argue backwards. He first assumes that Bitcoin is somehow bad, and then he goes on and builds his definitions based on that assumption. He can’t avoid interposing negative remarks on Bitcoin instead of addressing the consistency of his arguments. However, upon a careful analysis, the definitions he uses are not supported by Austrian scholars, and in some cases, directly contradict him. Many of the issues I pointed out to him (e.g. secondary media of exchange) are left unaddressed entirely. Furthermore, he takes the exposing of his contradictions as a personal attack on him. But I don’t care about him. I care about arguments. I don’t know if Dave will address his contradictions, but that’s at best secondary to me. What is of primary importance to me is that I formulate my arguments in a coherent manner. Yes, I’m selfish.
But history has shown that occasionally, this has a beneficial effect on others.

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