The Economics of Bitcoin: A Response to “Smiling Dave”

It would appear that, of all regression-based criticisms of Bitcoin, blogger “Smiling Dave” has put forth the most convincing arguments, arguments that I failed to specifically address in my last post. Thus, I would think it is worth going through his criticisms and responding to them specifically.

Perhaps the most fundamental criticism Dave puts forth is the claim that a medium of exchange must be widely used. He quotes Mises as holding this definition as well, arguing that those Austrians who define a medium of exchange as a good which is held for its exchange value are simultaneously arguing against Mises himself on this matter:

“Remember, we are talking about what Mises meant by medium of exchange, not what [Bob] Murphy means or what I mean…Mises spells it all out explicitly, in Chapter 17, section 3, of Human Action:

A medium of exchange is a good which people acquire neither for
their own consumption nor for employment in their own production
activities, but with the intention of exchanging it at a later date
against those goods which they want to use either for consumption
or for production….Media of exchange are economic goods. They are scarce; there is
a demand for them
…There are on the market people who desire to
acquire them
and are ready to exchange goods and services against

them…People make sacrifices for their acquisitionThere exists a demand for media of exchange because people want to keep a store of them. Every member of a market society…”

Upon further analysis, we see that Dave is grasping at straws here. Where in this quote does Mises say that a medium of exchange has to be widely used? Not once. He says that a medium of exchange is a good which “people acquire…with intention of exchanging it at a later date”, which holds true mine and several other Austrians’ definition on the matter. Mises continues to speak to how media of exchange have demand for them, and how there exists other people on the market who desire them. But we must make note that not once does Mises explicitly say the scope to which this demand must be, but merely that this demand must exist. Thus, it is clear that Dave misinterprets Mises on this particular account. By his own quote, Mises never speaks to the width or extent of this demand, simply that there be demand for it to some degree. When Dave says: “Mises is talking about so many people wanting the thing that there is “a market” for it. So many people want it that we can say there is “a demand” for the stuff. The demand is so huge that people want oodles and oodles of the media of exchange”, he will need to clarify where in the quote that Mises claims “so many people” must have a demand for it, or that the demand must be “so huge”. In fact, this interpretation may probably be written off as invalid because a claim of this sort would be extremely out of character for Mises. Throughout all of Human Action, Mises stresses the chain of logic and deduction: how could one possibly deduce some arbitrarily “wide” demand that a good must pass before becoming a medium of exchange? Portraying Mises in this light is unfair, at least by the quote that Dave gives us in his article. He will have to explicitly point to where Mises says a medium of exchange must be “widely” used, and to what degree the scope of the demand must be.

Before moving on, it seems necessary to point out that if we complete Dave’s quote of Mises, we find that when he says “Every member of a market society…”, he is talking about money, not media of exchange:

“There exists a demand for media of exchange because people want to keep a store of them. Every member of a market society wants to have a definite amount of money in his pocket or box, a cash holding or cash balance of a definite height.”

Dave then proceeds to argue that it is not the style of Mises to frequently use the word “people” instead of “individuals”:

“Mises writes over and over that not just one person wants it, but “people” want it. “They” want it. And those are very odd phrase for Mises to use, “people” and “they”. Because Austrian Economics is all about the individual…Mises would never talk about “people” when analyzing an economic concept, if he could possibly talk about the proper context for all economic discussion, the individual. Thus, if he talks about “people’ and “they”, he must mean that the object is not a medium of exchange unless “people”…covet it.”

While this certainly is true, Dave fails to note which section of Human Action he quotes from. When writing about money, of course Mises will not say “individuals”. Media of exchange or money requires at least two or more actors to exist within the market; we cannot conceive of these things without having multiple actors. It is apparent that for an individual, in an autistic economy, money has no use, its only use being for multiple people. Thus, it is not out of character for Mises to talk in these terms as he referring to a good that demands, for its existence, people, or more than one actor. Again, we must make note that at no point does Mises speak to how many people there must be for media of exchange or money to develop in the market, rather that there must be “people”, or two or more actors.

As a final point in his post, Dave claims that when Mises discusses money and media of exchange, that there is no distinction between the two, rather they are one and the same:

“One last thing. Mises writes that there is a fine line between money and a medium of exchange. The line is so fine that the theory of money and the theory of media of exchange are one and the same:

A medium of  exchange which is commonly used  as  such is  called
money. The notion of  money is vague, as its definition refers to the
vague term “commonly  used.”  There are borderline cases in which
it cannot be decided whether a medium of  exchange is or is not “com-
monly”  used  and should be  called money. But this vagueness in the
denotation of  money in no way affects the exactitude and precision
required by praxeological theory. For all that is  to be predicated  of
money  is  valid  for every  medium  of  exchange.  It is  therefore  im-
material whether one preserves the traditional term theory of  money
or substitutes for it another term. The theory of  money was and  is
always the theory of  indirect exchange and of  the media of  exchange.

Now money, says Mises, is something everybody wants:

At any rate, the immense majority
of  people aim not only to own various vendible goods; they want no
less to hold money.

Now I ask you, dear reader. If by medium of exchange Mises meant something only a few geeks had any use for, would the theory of such a thing be EXACTLY the same as the theory of money, something everyone wants, as Mises wrote? I thought not. That difference, between a geek or two wanting it and everyone wanting it, would have huge theoretical repercussions.”

Here, we see that Dave once again unfortunately misinterprets what Mises was asserting. He was not saying that they are the same thing, as shown by this part of the first quote: “There are borderline cases in which it cannot be decided whether a medium of  exchange is or is not “commonly”  used  and should be called money.” Ironically, Dave’s quote here refutes his earlier claims that Mises defines a medium of exchange as something that must be “widely” used. Nevertheless, Mises makes it quite apparent here that the distinction between a medium of exchange and a money is common use, though this distinction is arbitrary, a fact that he fully accepts later in the first quote. It must be emphatically stated, however, that he is not saying that they are the same thing. He is saying that “all that is to be predicated of money is valid  for every medium of exchange.” Dave’s fallacy here is one of induction: though Mises says that all money must be a medium of exchange, it does not follow that all media of exchange are also money. He simply is saying that the distinction between the two is of “wide use”, and this distinction is arbitrarily determined.

With the idea that media of exchange must be “commonly used” sufficiently refuted, we may now turn to some of Dave’s other criticisms. In this post, Dave puts forth the argument that Bitcoin is not being used as a medium of exchange right now, because it isn’t being widely used:

“The latest claim is that bitcoin is ALREADY a money, or a medium of exchange at the very least, and so of course bitcoins very existence proves Mises wrong…[Mises’] regression theorem claims to prove bitcoin cannot exist as a money, because it is a money coming into existence with no intrinsic value, but here it is, existing and a money…Here’s what these guys don’t get. To be a medium of exchange, and certainly to be a money, a thing has to  generally accepted by a wide audience.”

Dave then continues on to give a hypothetical example of a man and his employer, where the employer attempts to pay the man with Bitcoin. The man then rejects the payment because only 10,000 people across the world use it. But as we have shown above, Mises does not say that a medium of exchange must be widely used. Only a money good must be. We find in general that many of Dave’s criticisms fall apart once we apply this knowledge.

It should also be said that, if we take Dave’s hypothetical example and reverse it so that the man accepts the payment, then proceeds to trade the bitcoins with the other 10,000 people who own them, what may we call Bitcoin then? It isn’t being used for its direct use value, but clearly for its exchange value with the other 10,000 people. So if it isn’t a good for direct use, and Dave doesn’t believe it to be a medium of exchange, then what could it possibly be? In addition to this, I would hope that economists as distinguished as Mises and Rothbard would elaborate on what goods that aren’t valued for direct use, but aren’t media of exchange either, would be defined as. Yet this ties in to the argument I was making earlier: Mises and Rothbard give no elaboration because they claim that the criteria for a medium of exchange is simply a good holding exchange value, and has nothing to do with the breadth of its use in the economy.

Moving on to this post by Dave, one in which he quite astutely refutes some of the ongoing confusion on the regression theorem’s application to both a barter and money economy, we find him partially change his definition of a medium of exchange. Remember that he, in an earlier post, argued that media of exchange must be widely used:

“If Mr A and Mr B use playing cards as their money, meaning that they buy and sell things to each other and accept payment in playing cards [which they don’t intend to play card games with, but to use as money at a later date with each other], but nobody else does, does that make playing cards a medium of exchange?

The answer is, yes it does, for those transactions in which it was used. But it is certainly not a medium of exchange for in those transactions in which it was not used…Why is this important? Because when people talk about something being a medium of exchange, they don’t mean it was used once. They mean it is used often.”

I do not know which people have been talking about a medium of exchange as something that must have been widely used, but as I elaborated earlier on, these people are mistakenly claiming that this view is Austrian, when they are not actually arguing from Mises’ framework. This being said, Dave admits that the playing cards are a medium of exchange for their micro-economy, however not for the “macro” as there are a large amount of people in the economy who would not accept the cards as money. However, by admitting in this instance that the cards are a medium for the two actors, Dave is also conceding that the cards could in the future be used as a money, as the only prerequisite for a money good is that it is also a medium of exchange according to Mises.

Perhaps here it would be useful to draw an analogy of my own, one that will highlight all the collective errors made by Dave as described above. In prison systems, it has been discovered that inmates use cigarettes to trade amongst each other, acting as a medium of exchange for that prison. It is obvious that the cigarettes, outside of prison, would not be accepted virtually anywhere in the economy. Thus, we may say that the cigarettes are not “widely used”. However, for the micro-economy that exists in prisons, the cigarettes hold exchange value, and thus clearly are a medium of exchange, despite not being widely accepted by the entire economy. Now imagine a prison where there are only three inmates. They use cigarettes for their exchange value, which are then defined as a medium of exchange. Now imagine a prison where 99% of the world’s population are inmates. They use cigarettes for their exchange value, and are then defined as a medium of exchange (or potentially money). Why is it that, under Dave’s definition, only the latter would classify as a medium of exchange, when both situations involve actors valuing cigarettes for their exchange value? And if the former case still, under his logic, cannot be classified as a medium of exchange, what exactly are the cigarettes? Hopefully Dave will offer some clarity in regards to this distinction.

Returning to Dave’s post, he then proceeds to attack Bitcoin for not having any direct use value, an assumption that I refute in an earlier post of my own, and thus will not belabour this point.

In a different post, Dave goes so far as to make the claim that Bitcoin has never been used as a medium of exchange. Though his argument is more nuanced, and requires more thought than to just make the point that this couple traveled the world purchasing things with Bitcoin, it is important to note that the acceptance of Bitcoin is definitely becoming more widespread with the passage of time. I urge readers to do some internet research, this website being a good place to start.

Now, the particular argument that Dave makes in this post is that those who buy and sell Bitcoin in terms of fiat are not truly using it as a medium of exchange, and that fiat is still the true medium of exchange (or money) in these cases:

“All the buying and selling of bitcoins for dollars or pesos or other currencies over at and other places are not, repeat not, transactions where bitcoins are media of exchange. Only instances where a person sells his apples in exchange for a bitcoin, and then buys oranges with the bitcoins, count as bitcoin being a medium of exchange.

I will take an educated guess and say that those events are extremely rare. I will go so far as to say they never happen. I think that everyone who sold something and accepted bitcoin in payment then went right ahead and redeemed them for dollars…If you look at the online catalogue of things for sale with bitcoin an acceptable payment, they are mostly useless knick knacks that the seller was unable to unload for dollars”

Ignoring the fallacious assumptions he makes in saying that such events “never happen”, we see that Dave’s fatal mistake in this situation is that he is not viewing the fiat dollar as a good in itself. A transaction in which an actor buys a bitcoin, paying with fiat dollars, and then uses that bitcoin in buying say, an apple, is by definition using the bitcoin as a medium of exchange. The fiat dollars as a good are not being used to buy the apple, and thus, in this transaction, cannot be defined as the medium of exchange in use. It is the marginal utility of the purchased bitcoin, not the fiat dollars, that are being weighed against the marginal utility of the then purchased apple.

His argument can be related to that of gold and fiat money. If I sell my fiat dollars to buy a bar of gold, and then use my bar of gold to buy an apple, what is the medium of exchange being used? Dave would say that it is the fiat dollars, and that it is not the gold, but this is incorrect. The dollars are not being valued for their exchange value in the transaction, rather the gold is. We could use Dave’s logic to similarly say that if I sold my apple to buy a bar of gold, then used my bar of gold to buy fiat money, that it is then the apple that is the medium of exchange in this transaction. This is patently untrue, as the apple was not being valued for its exchange value. In application to other examples as well, we find his conception of what truly is the medium of exchange to be illogical. If I sell my house to buy fiat money, then sell my fiat money to buy an apple, we do not say that the house is the medium of exchange. Clearly it is the fiat money. Or in another case, if I sell my labour to buy a bar of gold, then use that bar of gold to buy a house, the medium of exchange in this transaction isn’t my labour, but the bar of gold.

While I doubt I have covered every conceivable problem Smiling Dave may find in Bitcoin, it is needless to say that I believe this refutation of the fallacy that Bitcoin “isn’t”, or “can’t” be a medium of exchange is more than sufficient. Dave’s misunderstanding of Mises’ definition of a medium of exchange appears to be the central error in his analysis, and as I have shown, all other subsequent arguments made from this basis fall apart under the microscope of logic. I invite Dave, in good sport of course, to respond to any mistakes or potential straw-manning on my part, and thank him for exercising my mental capacity to the degree that his arguments did!



  1. Smiling Dave took a strong position on bitcoin years ago before he took the time to educate himself on the technology behind the distribute consensus asset ledger. Despite the years of the empirical data since then proving him to be wrong, instead of altering his believe structure he decided to let his ego force him to double down on his error. His analysis is now illogical and self contradictory. On his blog the other day he claimed bitcoin was not money because people were hoarding it instead of spending it, as if hoarding (saving) is not an integral part of a healthy growing economy. I predict he will never admit his error, he will continue to fade over time as a bitter remnant of a time gone by.

    1. This might be true, but I don’t know as I haven’t been around long enough to assume that he won’t listen to arguments. I enjoy debating people and he did have some credible points, so its worth listening to him so long as he will listen to me!

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