Josh Levine's hard time understanding Bitcoin
Josh Levine recently posted another struggle session about Bitcoin to understand where a bitcoin gets its value from.
His argument goes like this: if there were free cookie coupons, people might end up trading them like money, but only because somewhere there was someone who actually wanted a free cookie. If the coupons can't actually get someone a free cookie, then they never would have worked as money.
Josh says bitcoins are coupons that don't get people cookies.
T-1, T-2, T-3, and...intrinsic value!
He doesn't mention it in the post, but Josh is aware of the Misean Regression Theorem. This theorem suggests that if you look back at the history of anything used as money, it always starts out having some value by being useful as not-money.
No good can be employed for the function of a medium of exchange which at the very beginning of its use for this purpose did not have exchange value on account of other employments. Mises, Human Action
Looking back at a few of the other posts Josh has written on this topic (he says he really wants to like bitcoin), I found several commenters who brought up the Regression Theorem and various explanations for how Bitcoin satisfies it.
Josh paraphrases the Regression Theorem like this:
”The value of money now is based on the value of money established previously when the money had actual intrinsic value, even though that value is no longer associated with the money. This happens because people get used to the money having value while it still does and therefore do not care (notice?) when that original source of value is gone.”
He also says he "wholeheartedly doesn't believe it!"
Quack! Where does the value come from, Josh?!
In one of his replies to comments, Josh says:
My (personal) test if a thing has "value" (probably better called "intrinsic value"): Is there someone who wants the thing as an end in itself -- as opposed to a thing where its only use it that it can be traded for something else.
Of course this leads us dangerously close to the precipice of regression. If value can only come from someone wanting a thing as an end in itself, what does Josh think of money?
Currencies do not have value in and of themselves.
This is something Josh says in a neat little story he wrote about being on a desert island with a guy named Nakamoto. In another post (How a Bitcoin Is Not a Dollar), he surmises that dollars have value because they represent a claim on the US government:
You can redeem a dollar for the right to not get arrested for not paying your taxes. You can redeem it for the right to transport a shipping container of steel over the US boarder.
(Let's ignore for this argument that Josh is implying that our government puts all of us under constant threat of jail and violence and the only way we avoid this is by giving our governors cookie coupons -- as if our natural state is jail, and we only find freedom if we are able to buy it from the government.)
When Josh turns his dour eye to Bitcoin, he doesn't find any redemptive qualities at all:
I think that under the standard interpretation, people only buy bitcoins because they expect to be able to sell/trade them later – so (by my definition) this bitcoin has no intrinsic value.
Satoshi don't care
As I was scrounging around for more on this topic, I came across a lovely thread on BitcoinTalk from 2011 (actually, someone linked to it in the comments on Josh's blog). As is so often the case in Bitcoin, somebody was already thinking about it.
The thread starts with a post called "Bitcoin does NOT violate Mises' Regression Theorem" and gives a nice explanation of Regression Theorem and then attempts to apply it to Bitcoin, ultimately coming to the point that Bitcoin satisifes the theorem by getting it's ultimate value from...other money.
I can't say that I found this very satisfying.
But what's really cool is that Satoshi replied to the thread.
Maybe it could get an initial value circularly as you've suggested, by people foreseeing its potential usefulness for exchange. (I would definitely want some) Maybe collectors, any random reason could spark it.
"Potential" usefulness in exchange is interesting. Voskuill has a post about the Regression Theorem, too, where he suggests that the theorem is actually broken by its own logic.
The theorem fails to terminate its regression by not explaining how a person comes to value something for its original utility.
He notes that the first time people come into contact with anything new, they have to guess at its usefulness (and, therefore, its value). That guess is subjective (meaning there's not really any wrong or right guess).
The first valuation of a thing, like all after, can be for any reason, including its use as a money.
As more people encounter the thing, what looks like "intrinsic value" may emerge; but really what we mean by that is "pretty widespread agreement about the usefulness of the thing." New ways of using a thing can change the intrinsic value.
Bitcoin gets its value because people use it
People didn't start using bitcoin because it was valuable. People started using bitcoin and it became valuable because they were using it.
While this may not be a satisfying answer to very many people (it wasn't satisfying to Josh when I left it as a comment on his blog), Satoshi pretty much nails it:
But if there were nothing in the world with intrinsic value that could be used as money, only scarce but no intrinsic value, I think people would still take up something.
Bitcoin gets its value because people are social and we grab on to things that help us cooperate with each other. It's not like language emerged because sounds had some intrinsic meaning, nor did all writing start as pictograms. Language has meaning because humans formed groups around the shared use of similar sounds.
So: going back to Josh's definition of value from above, the end people want out of bitcoin is that particular cooperation with others it which can only exist if we use it.