Smiling Dave continues to post about Bitcoin and making up more and more ridiculous arguments as the gaps in them are exposed, and continues to distance himself from the Austrian approach more and more. However, I recently noticed something more serious: he created a new contradiction.

In All About a Medium of Exchange Having to Be in Wide Use, he writes this:

“It means a medium of exchange has to be more marketable than most things. It has to be in wide demand.”

I will divide this into two parts: (1) a medium of exchange has to be more marketable than most things, and (2) it has to be in wide demand.

Marketability of media of exchange

The first part is the one where he introduced a contradiction. This is because when I previously explained to him that the regression theorem is about the emergence of the function of a medium of exchange from liquidity, he disagreed:

“Pete has done this as well in his last post, confusing liquidity with general acceptance as a medium of exchange.” [emphasis added]

Maybe he does not understand that liquidity and marketability are referring to the same phenomenon? In that case we can expect his next post to concentrate on explaining the difference between liquidity and marketability.

Now, as I explained several times already, including in my thesis and earlier posts, the connection between liquidity and medium of exchange function is empirically observable with Bitcoin. It was already liquid in early 2010 when the first use as a medium of exchange was observed. It confirms both Menger’s and Mises’ observations. Furthermore, Menger emphasised the importance of “organised markets” (exchanges) and speculation in playing a role in the concept of liquidity. We observe these two with Bitcoin as well.

Wide acceptance and marketability

Smiling Dave has erroneously argued that somehow wide acceptance is a characteristic of marketability. However, Menger was very clear both in his definition of marketability:

“A commodity is more or less saleable according as we are able, with more or less prospect of success, to dispose of it at prices corresponding to the general economic situation, at economic prices.”

There is no sign of “how widely accepted/demanded it is”. Furthermore, Menger explains that the factors influencing marketability can be divided into two categories: time (when the commodity can be sold) and place (where the commmodity can be sold). Again, no sign of “width”.

Wide demand is not marketability. There are goods which are widely demanded, yet they are illiquid. A very good example are houses: there is a practically universal demand for houses (apart from people who want to live homeless), yet it is difficult to sell a house easily at an economic price. You need to spend money on marketing, you might need to pay an expert for appraisal, you might need to clean it or fix it, there are often special taxes and fees and the necessity to hire a middleman and/or a lawyer to facilitate the sale, and you probably need to wait quite a while in order to get a price corresponding to the general economic situation. If you want to sell it right now and right here, you most likely need to take a huge price cut. This means that houses are illiquid. And illiquid goods cannot be a medium of exchange.

Just like there are widely demanded illiquid goods, there are narrowly demanded liquid goods. Nothing exemplifies it better than early-stage cryptocurrencies. There are very few people demanding them when they emerge. Yet because the internet is accessible anytime and from almost any place, and exchanges allow to place bid and ask offers, the logistical obstacles for the emergence of liquidity are dramatically reduced. If you want to sell a cryptocurrency, you can do it no matter where you are and what the time is, and get a price very close to the current market price. Most exchanges operate 24/7. Then there is, which helps you find people in your area if you want to sell for cash or a national bank transfer (at the time of writing claiming to have offers in 5451 cities in 216 countries). In the last couple of months, Bitcoin  “ATMs” have started being deployed (even though only those that allow to sell, rather than only buy, bitcoins, are rarer and only those count towards liquidity). Furthermore, an increasing number of shops, online and offline, accept Bitcoin as a payment mechanism. This means that holders of Bitcoins can dispose of them in increasingly easier and varied ways at a price corresponding to the general economic situation. Bitcoins are increasingly more liquid, and this means people can use them as a medium of exchange, i.e. hold them for their purchasing power.

The gap between media of exchange and money

Bitcoin shows that the level of demand for liquidity to emerge is lower than many economists have anticipated (and many still don’t get). However, we need to be careful when applying this to money. The level of liquidity necessary for money may still lie very high and be unattainable for Bitcoin for all we know. While the implied assumption so far has been that there is a big gap between “nothing” and a “medium of exchange” and a narrow gap between “medium of exchange” and “money”, Bitcoin shows that there are goods where the relationship is reversed: there is a narrow gap between “nothing” and “medium of exchange”, and a wide gap between “medium of exchange” and “money”. This is why it is important to distinguish between money and a medium of exchange, yet another difficulty many economists seem to face: they do not have a theory for media of exchange that are not money. Neither does Smiling Dave.
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