The Ludwig von Mises Institute (the one behind, located in Auburn, Alabama) posted several articles over the last week or so about Bitcoin:

Prior to that, they posted about it during June 2011, by Justin Ptak:

And one in October 2011, by Jeffrey Tucker:

In the meantime, Jeffrey Tucker became a Bitcoin enthusiast (disclaimer: I’ve been interviewed by Jeffrey and Laissez-Faire Books is publishing my book about Bitcoin, so I might be biased). Justin Ptak appears now to be friends (on Facebook) with Bitcoin fans. This may or may not imply his change of opinion, but it doesn’t look like he published anything more about Bitcoin at least.

Now, there is nothing wrong with criticism. And Bitcoin can be criticised, there are many legitimate objections to it. But to criticise something merely because someone feels a pressure to criticise, and then rushes to hastily print something quickly is not scholarly work. It is symptomatic that the institute didn’t publish anything in between. They are under pressure to publish something when there is a media interest in Bitcoin, and hence hastily rush to assemble something. But actual academic research appears to be absent.

The main issue appears to be the conflation of money, unit of account and a medium of exchange. Unit of account is not a necessary function of either money or a medium of exchange. It is merely a possible byproduct of it.

A further issue is the “self-reinforcing monetary spiral” (i.e. which mainstream economists call the network effect), in which one medium of exchange emerges victorious and beats all other media of exchange and that we call money. But this is merely a hypothetical model that is furthermore prone to misinterpretation. First of all, transaction costs can prevent this spiral to escalate to its final stage. Currently, we have hundred something currencies all over the world. Legal restrictions prevent this spiral from playing out. But this is merely an empirical factor, rather than a rule that gives legal restrictions magical powers. Even without legal restrictions, we can’t be entirely sure that the transaction costs won’t hinder a full monetisation.

The second issue is the neglect of other media of exchange, those that are not money. Mises calls them “secondary media of exchange”, and Rothbard calls them “quasi-monies”. These goods are liquid, and a part of their demand is due to their liquidity. They are not liquid enough to be money, but nevertheless they serve, not only through their other uses, but also through their liquidity, a valuable purpose. This is what Bitcoin is. This is what gold is too. And this is also the pool for potential candidates for money. Before something can be money, it must be a medium of exchange.

Bitcoin is somewhat liquid, and it has a very important advantage against extant money: it reduces transaction costs. It reduces transaction costs even further than existing payment mechanisms, so that even a fluctuating price is not enough to offset this reduction. We can therefore expect Bitcoin to be used as a payment mechanism in those areas where it can substitute for other payment mechanisms. This is also a type of network effect. Once they use it as a payment mechanism, people may decide that they do not actually need to fully convert it to/from fiat, and use Bitcoin as a store of value as well. Indeed, Tony Gallippi from BitPay reported (can’t find the link now) that their customers are increasingly opting to keep a larger proportion of the payment in Bitcoin, whereas at the beginning they just converted the whole sum to fiat money.

Yet again I have to quote White in his brilliant insight, which has not yet been processed by other Austrians:

“Coinage reduces transaction costs compared to simple exchange, because of authentication and weighing. Bank liabilities also reduce transaction costs. But these are empirical factors, and not something inherent in all possible monetary systems.”

Rather, other Austrians make empirical (!!!) statements like this (Salerno):

“With the use of clearing systems, money substitutes are virtually costless to transfer.”

An adoption as a payment mechanism, and expansion into a store of value are the early stages of monetisation. This is the same mechanism as the Austrians hypothesised occurred during pre-monetary times, only we now already have a different money. But already existing money is not a showstopper for this mechanism to work. Liquidity is just not the only factor influencing the choice of media of exchange. The argument of Hoppe that

“Driven by no more than narrow self-interest, man will always prefer a more general, and if possible, a universal medium of exchange to a less general or non-universal one.”

is therefore false. It is only apodictically true in a world without transaction costs. It still may happen in a world with transaction costs, we merely can’t be sure about it. And Bitcoin is a hint that empirical factors can’t be dismissed entirely. EDIT: If the statement of Hoppe was true, once money exists, it could never have been replaced by a new money, and we clearly know from history that that’s not the case.

Will Bitcoin ever become money? That’s an empirical issue and we can’t know this in advance. But equally we cannot dismiss it, unless we find a competitor to Bitcoin based on fiat money (or precious metals like gold) that is able to mitigate the transaction cost advantage of Bitcoin. And that would be very difficult to pull off. One of the reasons is the transaction costs associated with the boundary between money in the narrower sense and money substitutes (such as redemption, settlement, and so on), which Bitcoin does not need. Bitcoin is form-invariant and can exist in practically any imaginable (and unimaginable) form. The second one is regulation (management of money and money substitutes is strictly regulated and burdened by many restrictions which have nothing to do with monetary policy, such as anti-money-laundering, capital controls, war on drugs and so on). Even if regulation affects Bitcoin, unless there is an alternative that isn’t affected by regulation, there is still no reason for Bitcoin users to switch to something else.

But Bitcoin can do much more than become money. With algorithmic contracts, it can make large parts of the financial sector obsolete. With its ultra low transaction costs, it can make money substitutes redundant (and, obviously, without money substitutes there is no credit expansion and without credit expansion there is no business cycle). Again with its transaction costs and abstract base, anyone can make a payment to anyone, anytime, anyplace. Nothing that has existed so far in the history can do that. And even if we disregard it as a hypothetical, we just need to remember that gold already failed, because it was reduced from money to a secondary medium of exchange. This was only possible because money substitutes emerged. If nothing else, Bitcoin shows that money substitutes are merely an empirical quirk and not an inherent feature of monetary systems, and for that alone is it should change the landscape of the Austrian literature forever, and open a wide spectrum of possibilities for research and our understanding of money.

For more in depth analysis, I recommend my master’s thesis, or if you wait a while you can get an updated version in a book format.

28 thought on “The Mises Institute is clueless about Bitcoin”
  1. All needed to be said. Well done. I was especially shocked when Korda's article was reprinted. I had followed your discussion with him at its original publication and thought it had been completely refuted. Then it just shows up again later on basically UNCHANGED from the original version! This is a sad state of affairs. The bit about obsoleting money substitutes is also a key point I have made. I would say people can try offering them, but they would really have an uphill battle to actually contribute anything over what Bitcoin "in itself" already delivers.

  2. On the other point, I have also been suspicious of this switch from a theoretical statement of the relative advantages of a single medium of exchange to the empirical forecast that only one monopoly medium of exchange would actually result on a free market. This type of quick switch is part of what I call "over-stretching" with rational theorems, the over-stretching being into the empirical assumption side. I have always preferred to think that at least several parallel media would emerge and thrive, which is more the picture Hülsmann put forward in The Ethics of Money Production. There are always countervailing advantages to having more options, that people can shift in and out of. The tendency toward a single media is just one tendency among others.

  3. Yes and no. My point is we cannot assume all other things are the same, in particular when our current situation. And an email exchange I had with Hoppe back in 2011 indicates that he does not think that once you have money, it's irreplaceable. I'm attempting to stress the entirely hypothetical nature of the argument and that it shouldn't be given unnecessary weight.

  4. I found a good point somewhere, and I'm wondering what is your opinion about it. It goes something like this:

    Bitcoin doesn't have real scarcity. While bitcoins have scarcity, the entire system of bitcoin can be copied multiple times with other name, so there would be many indentical cryptocurrencies.

    So if they serve identical need, and the only difference in quality is its popularity (or call it a brand), unlike commodity money which has differences in physical properties to distinguish themselves, wouldn't multiple identical systems like bitcoin really inflate bitcoins (theoreticaly indefinitely)?

  5. Hi Peter

    "With algorithmic contracts, it can make large parts of the financial sector obsolete."

    Can you give a quick sentence or two on this? Never heard of algorithmic contracts before.

  6. they'd belong to a different 'system', if you just copied it like that with no changes, people would have to invest in the copied version, and why would why? Bitcoin is created with the intention for improvement, it is possible for someone to create a change and fork the program to their own version, essentially copying Bitcoin. This is intended, competition is good. If a significant improvement is made then eventually people would migrate over, or it might be adopted by the primary blockchain (which is most likely). Though as it stands such improvements are presented to the foundation for being added into the current blockchain.

    Basically, what you said is an intended part of Bitcoin, to inspire competition and growth. It would however not inflate the Bitcoin market as you can not make extra copies of Bitcoin like that, its due to the primary maths numbers (the only way is a 51% 'attack', which is essentially impossible).

  7. Great essay, Peter. I have a comment/question about a part of it:

    "And even if we disregard it as a hypothetical, we just need to remember that gold already failed, because it was reduced from money to a secondary medium of exchange. This was only possible because money substitutes emerged."

    To be clear, neither silver or gold failed. They were relegated to their current status by fraudulent decrees backed by force of the state.

    The important thing about Bitcoin is that it's the first universal money to be money without a state decree – fiat – since electrum, gold, silver, copper and iron were first employed by governmentless humans long ago.

  8. Hi Peter

    The reaction of the Mises Institute to Bitcoin is disappointing but not unexpected. To understand why, it is necessary to realize that the Institute was founded to promote a Rothbardian paradigm of which Misesian-style Austrian economics is merely a subordinate part.

    Austrian economics is expounded at the Institute only to the extent it supports Rothbard's normative conclusions. (in this case, his normative convictions regarding gold and the gold standard) When formal Austrian economics conflicts with Rothbard's normative conclusions, the Institute promotes Rothbard's normative conclusions and argues against (explicitly or implicitly) formal Austrian economics.

    Salerno, Hoppe, Shostak, etc., are hardcore Rothbardians. White was never a Rothbardian and cannot be counted on to support Rothbard's normative views, and that is why his writings are not promoted at the Institute.

    To understand the Mises Institute, you have to understand that its purpose above all else is to promote Rothbard's views, and in Rothbard's conception, Austrian economics serves the purpose of justifying or rationalizing only a portion of his normative convictions. In cases where Austrian economics cannot plausibly support Rothbard's convictions, it is jettisoned.

    Thus, for example, when a Rothbardian wants to argue for a Rothbardian norm, the concept of subjective value will be abandoned and (implicitly or explicitly) the concept of "intrinsic" or "objective" value will be employed.

    The Institute is "Misesian" in name only. In practice it is the Rothbard Institute, delegating to Mises and Austrian economics the task of providing theoretical support for a portion of Rothbard's norms.

  9. You can read more about it here:

    Basically, a bitcoin transaction can be more advanced than simply giving the coins to someone else. You can also put requirements on the coins which the reciever need to fulfill in order to spend them.

    One possible use case is to spend the same coin to multiple adresses controled by different people. Then you could put a requirement on your transaction that a specific number of the recievers would have to sign a transaction in order to spend the coin again. The coin is unspendable until a sufficient amount of them agree where to send it.

  10. It of course depends on how you define "failed". But the Austrians have a long history (Mises and Rothbard) of giving the highest normative preference to free market money because it prevents the state to exercise monetary policy (i.e. redistribution of wealth). And here is where gold failed. For Austrians following Mises and Rothbard's normative goals it should therefore be clear that gold is not a suitable means to achieve the goal of separation of money and state. Good money must be able to resist the state, and the banks. I don't know if Bitcoin can do that but from this perspective it's way more suitable than gold. Check out a 2 year old article by Michael Suede:

  11. I deal with this on a very broad level in my thesis, I think section 3.6, the one labeled something like "If Bitcoin fails, what would replace it?". I also deal with it in a bit more detail in two of my blog posts:

    Basically, both Hoppe and Korda are wrong. The network effect (whether in money or anything else) is neither omnipotent as Hoppe presents it, nor impotent as Korda presents it. It's somewhere in the middle. So while we can't be sure that one money will beat all else and emerge victorious (it could, we just can't predict that in advance), we can estimate that there will tend to be a small number of dominant players, and the market share fluctuations will tend to get slower the more mature the industry becomes and the larger the market share becomes.

    The scenario of "inflation through competition" is unrealistic. That's not to say that competition is entirely absent, it would just get a smaller issue as time goes.

  12. Two further comments:

    1. Clarification. What I mean to say is that in Mises's theory, gold or the gold standard is a means to an end. Mises holds that the gold standard is/was merely a means to render the exchange value of money independent of partisan politics. If the means are found to be faulty or insufficient, and other means superior, then it is perfectly consistent with his scientific vision that the former means be abandoned and the superior means adopted. Obviously, virtual or computer currency was not an available means in his time. As he saw things, gold or the gold standard was the best AVAILABLE means to keep the money supply independent of political manipulation.

    By contrast, Rothard tended to see gold as an absolute or "objective" value. He saw gold not merely as a means to an end, but as a fundamental and absolute value within his conception of libertarianism. To him, libertarianism includes gold as a fundamental value. We know from Rothbard's The Ethics of Liberty that he was a proponent of such objective or absolute values while Mises was an opponent of any kind of objective or absolute theory of values. Rothbard was willing to jettison subjective value theory and switch to objective or absolute value theory if that would support is convictions. In his mind, the gold standard was an absolute good, and fractional reserve banking and free banking were absolute evils.

    This is what I meant in claiming that the Mises Institute seeks to advance a Rothbardian and not a Misesian paradigm. Whenever there is a conflict between Austrian economic theory or developments in the libertarian world (such as Bitcoin) on the one hand, and the concrete values of Rothbard the man on the other hand, the Institute will generally advance the values of Rothbard the man over Austrian economic theory and over advances in libertarianism or libertarian theory.

    This explains why the Institute has come out against Bitcoin in its published articles. For Rothbard, gold is a fundamental absolute value. Anything that contradicts or threatens this notion is to be opposed.

    2. I've made a short post suggesting a possible application of Gresham's Law to Bitcoin:

  13. No. Ask George Selgin or Larry White. Or ask any of the Hayekian Austrians such as Horwitz, Boettke, etc. The Institute wouldn't support Selgin and White because they advocated free banking and Rothbard was vehemently opposed to it. Read Rothbard's "The Present State of Austrian Economics" (1992). Once you read that essay, you will understand what is and what is not allowed at the Mises Institute. Rothbard was the original head of academics at the Institute. Any theory or libertarian development that contradicts any of Rothbard's strongly held beliefs will generally be opposed by the Institute.

    Mises favored free banking, but the Institute is comprised of Rothbardians (Salerno, Block, Gordon, Rockwell, Kinsella, Murphy, etc.) and so the Institute has always been against free banking. They are not libertarians in the general sense (generally in favor of liberty from the state); they are specifically Rothbardian libertarians. This means they advocate a specific set of concrete values that Rothbard advocated, such as the gold standard, the notion of a pure libertarian society consisting of only private protection agencies, etc. They are absolutely against free banking and fractional reserve banking, even if voluntarily agreed to among consenting adults. This comes from Rothbard's natural-law, natural-rights philosophy which departs radically from the Austrian theory of subjective value, and substitutes a theory of objective or absolute values.

    According to this kind of thinking, gold and the gold standard are seen as absolute values that are inseparable from libertarianism. A libertarianism or libertarian future absent a gold currency is virtually unimaginable to such a mind. They are not that interested in a currency, whatever its concrete form, that conforms to general libertarian principles. They are much more interested in the concrete currency that their philosophical leader, Rothbard, wanted, and that is gold.

    The Institute is a Bitcoin opponent due to Rothbard's objective-value philosophy which he argued for (and against an Austrian approach) in the first 26 pages of The Ethics of Liberty. They are against Bitcoin because it doesn't square with Rothbard's particular vision of libertarianism in which gold is the only money.

    That is why uninformed and sloppily written articles opposing Bitcoin will be published by the Institute, while well-informed and well-written articles in favor of Bitcoin will not be published by them.

  14. At least partially I disagree. Kinsella is my friend and has been very supportive of my Bitcoin research, reading what I wrote and providing helpful comments, and getting me in touch with Jeff Tucker. In an earlier draft of my thesis there is a part that analyses Bitcoin from the point of view of title transfer theorey of contract and he (Stephan) said it appears ok to him. He doesn't think that FRB is per se a violation of property rights, and he said that he always thought that eventually we'll end up with electronic money. Murphy has been very neutral about Bitcoin, and also does not appear to think that FRB is fraud, and now is working on blog posts about Bitcoin on his site and promised to read my thesis.

    Salerno is a big disappointment, but Gordon and Block provided helpful input (directly by emailing with them or indirectly by watching their lectures), even though that might not have been intentional. One of Block's lectures is key to my interpretation of the regression theorem, for example.

    So there appears to be a rift. Just like there appears to be a rift along the freebanking or IP lines. But unlike freebanking and IP, Bitcoin does not give a f*** what the Misesians thinks about it, because it already works.

  15. OK Peter

    However, you (and Konrad) were surprised at the official Institute position on Bitcoin as expressed in their published articles to date (as contrasted to the private correspondence). Their response did not surprise me at all. If you are OK with the response and understand it to your own satisfaction, then you have no need for my insight on this issue, so I'll drop it.

    I replied to your comment about Bitcoin and Gresham's law:

  16. I am a proponent of Bitcoin, my posts were meant to highlight this innovative technology while also illustrating the early growing pains of this very promising virtual currency.

  17. I apologise, I must have misunderstood it. My recollection (I commented heavily in the comment threads back in 2011) is that the overall mood was negative.

  18. I think Rothbard's opposition to fractional reserve banking did not stem from his "natural-law, natural-rights philosophy," but from his understanding of both history as well as speculation about what would happen under fractional reserves, especially if they were widely accepted. If we take his natural rights philosophy at face value, there is nothing wrong with what you called "free banking and fractional reserve banking, even if voluntarily agreed to among consenting adults". But this has nothing to do with whether fractional reserve banking is desirable or not (I personally think it could be under certain circumstances and for certain things). Rothbard and certain Rothbardians are wrong to call it fraud, but I don't think we have any reason to think they mean that something "voluntarily agreed to among consenting adults" is fraud. I think they mean it could be considered fraud because of people using notes that could be affected by fractional reserve banking in a way unbeknownst and/or undesired by them, i.e., inflation. But of course, no one necessarily made them use those notes. It is only if they are somehow deliberately tricked into using them that there could be said to be any fraud. But this has nothing to do with the specific banking practices.

    -Henry Moore (It keeps trying to publish my comment as "anonymous" for some reason)

  19. The reason (as far as I understand) that Rothbard, Hoppe, Block, de Soto and some others argue that FRB is fraud, is that they cannot fit it into the Title Transfer Theory of Contract, and that thus they conclude that the type of contract that would be required for FRB is not logically possible. I do have some critique of that in an earlier unpublished draft of my thesis, I'll publish it eventually.

    The other problem is of course government intervention. Some anti-FRB-ists seem to argue that without government intervention, FRB would not exist or be marginal even if it wasn't illegal. I tend to disagree here too but I'm not entirely sure. I haven't thought about this particular aspect to enough for my full satisfaction.

  20. It would be nice if you place that quote in the article as a rebuttal and just not saying I seem to have friends on Facebook who seem to be BTC fans. Thank you.

  21. I was surfing net and fortunately came across this site and found very interesting stuff here. Its really fun to read. I enjoyed a lot. Thanks for sharing this wonderful information.

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