When I was still in college, I read “Principles of Economics” by Carl Menger, and probably learned more about Economics than I did in my four years as an Econ major. (The book was a hell of a lot cheaper than my college degree, too.) Today, you don’t even have to pay for the book, as it’s available for free online, as an out of copyright work. https://competitionandappropriation.econ.ucla.edu/wp-content/uploads/sites/95/2020/12/Mengerprinciples.pdf
By the end of Menger’s book, you will understand the basic nature of money, and much more.
It is Menger’s book that has served as my touchstone when it comes to studying cryptocurrencies, such as Bitcoin. Before I will believe that Bitcoin is money, I would need an explanation of it that fits within the framework of Menger’s theory of money.
My goal here is to explain what I currently believe “money” to be, and then to explain what I would need to see as a feature of Bitcoin before I could believe it was money. (Or, I’d need to be shown how Menger’s theory of money is wrong, or in need of modification.) I will also provide reference to an article that seems to do just that, but the technical/engineering aspects of cryptocurrencies are outside my knowledge base, so I cannot say if the article is right or not.
What is money?
To understand what money is, you need to understand four concepts discussed in Carl Meger’s book: (1) Value, (2) The Marginal Theory of Value, (3) Use Value, and (4) Exchange Value.
Value
All goods where the requirements for their use and enjoyment are greater than the available supply have what Carl Menger called “value”.
If the good existed in amounts greater than the requirements of all the human beings that have access to those goods, then they would have no “value”.
For instance, a single person living in a forest that has thousands upon thousands of acres would likely view no particular tree as having any “value”. This is because there is so much timber available to him, that he needs only a small fraction of it.
Another example would be a small tribe living near a freshwater spring that produces many more gallons of water per day than the entire tribe can use. The “value” of any particular gallon of water for the members of that tribe is zero.
Marginal Theory of Value
The example of the tribe living near a freshwater stream points to another interesting aspect of “value”, which Carl Menger identified. This is the fact that any given unit of a good only has the “value” of the least important use it will be put to by a person.
For instance, a person living in a forest might first build a log cabin with a dozen trees, because shelter is very important to him. He might then use another tree for heat and cooking food. There might be just one tree left, which he can use for building a canoe. This last use of the last tree is the least important to him, since having shelter, heat, and cooked food are more important. But, the value of any one tree to him is the value of that canoe. This is because the canoe is what he would be giving up if he were to lose a tree for some reason.
In Economics, this is what is known as the “marginal theory of value”. It explains why, for instance, gold has a higher price per pound than water, in most contexts. Although water is overall more necessary for living than gold, in most normal situations, any given pound of water can be dispensed with more easily because water is so much more abundant than gold. (However, there could be a situation in which a pound of water is more valuable, such as to a person dying of thirst in the desert.)
Value Can Be Ornamental
Note that “value” can be entirely ornamental. Menger takes this as a given, but I think it would take a robust understanding of the requirements of human life to really see this. Seeing things of beauty has some sort of psychological effect on the human mind. We admire pretty paintings and statues because they are aesthetically pleasing to us.
Most men would rather gaze on a beautiful woman than an ugly one. Women wear makeup because it gives them a pleasing appearance. People wear jewelry because it makes them look better. Gold has been used to make jewelry for a very long time. Much of its value derives from this ornamental use.
This is still “value”, just as much as the painting of the Mona Lisa or the statue of David has value. It’s the psychological enjoyment that they seem to engender in people’s minds when they look at them.
“Use Value” and “Exchange Value”
Menger notes that certain goods can have value even when a person is alone. The hypothetical man living alone in a deserted forest might, for instance, have greater requirements for deer than the number of deer available to him, due to a scarcity of the animals. He might want more deer meat to eat, or more deer skins to turn into clothing, than he is able to obtain.
When people enter into trading relationships with one another, a good can have a different type of value. This is the value that the good has for obtaining other things that one might want.
For instance, the man living alone in the forest might encounter someone who lives near the ocean, and has fish. He might be willing to trade some of his deer meat for fish, in order to have a greater variety in his diet.
Based on these facts, Menger divides the concept of value into two sub-categories: “use value” and “exchange value”
In the case of the man who trades some of his deer meat for fish, it has “exchange value”:
“Value, we saw, is the importance a good acquires for us when we are aware of being dependent on command of it for the satisfaction of one of our needs—that is, when we are conscious that a satisfaction would not take place if we did not have command of the good in question. Without the fulfillment of this condition, the existence of value is inconceivable. But value is not tied to the condition of a direct, to the exclusion of an indirect, assurance of our requirements. To have value, a good must assure the satisfaction of needs that would not be provided for if we did not have it at our command. But whether it does so in a direct or in an indirect manner is quite irrelevant when the existence of value in the general sense of the term is in question. The skin of a bear that he has killed has value to an isolated hunter only to the extent to which he would have to forgo the satisfaction of some need if he did not have the skin at his disposal. After he enters into trading relations, the skin has value to him for exactly the same reason…. What lends a special character, in each of the two cases, to the phenomenon of value is the fact that goods acquire the importance, to the economizing individuals commanding them, that we call value by being employed directly in the first case and indirectly in the second. This difference is nevertheless of sufficient importance both in ordinary life and in our science in particular to require specific terms for each of the two forms of the one general value phenomenon. Thus we call value in the first case use value, and in the second case we call it exchange value.” https://competitionandappropriation.econ.ucla.edu/wp-content/uploads/sites/95/2020/12/Mengerprinciples.pdf
Goods that directly satisfy our needs have use value. Goods that indirectly satisfy our needs by means of trade for the goods that directly satisfy our needs have exchange value.
A Definition of Money Based On These Concepts
Something takes on the properties of money when it’s “exchange value” exceeds its “use value”.
From these concepts of “use value” and “exchange value”, Menger develops a theory of money that does not depend on any pre-existing social convention or governmental institution, above and beyond a government that protects private property rights and enforces contracts.
Economizing individuals engaged in barter will find that they are often unable to obtain the goods that they have direct, use value for through trade.
Menger gives the example of a Bronze Age blacksmith who has fashioned a suit of armor and would like to exchange it for raw materials for producing more armor, and also for the purchase of food to eat.
At that particular time, the people who sell copper and food might have no need of armor. But, perhaps there is someone selling some good that wants his armor. In that situation, if he believes he can trade whatever that good is for the food and copper he wants, then it would make sense for him to trade the armor for that good.
What matters to the blacksmith is that the good he obtains for his armor has greater “marketability” than his armor.
In real life, there are certain goods that are almost always in demand. Menger notes that in ancient times, cattle were often that good. A cow does not perish, as long as you can feed and water it. Eventually everyone needs the meat and milk of a cow. So, if the Bronze Age blacksmith trades his suit of armor for a cow, then he is closer to getting the food and copper he needs:
“Even if the armorer is already sufficiently provided with cattle for his direct requirements, he would be acting very uneconomically if he did not give his armor for a number of additional cattle. By so doing, he is of course not exchanging his commodities for consumption goods (in the narrow sense in which this term is opposed to “commodities”) but only for goods that also have commodity-character to him. But for his less saleable commodities he is obtaining others of greater marketability. Possession of these more saleable goods clearly multiplies his chances of finding persons on the market who will offer to sell him the goods that he needs. If our armorer correctly recognizes his individual interest, therefore, he will be led naturally, without compulsion or any special agreement, to give his armor for a corresponding number of cattle.”
Menger notes that during ancient agricultural times, cattle and other domestic animals often served as money. As civilization progressed, and we became more urban, the materials of skilled artisans, specifically, copper, silver, and gold came to have money character:
“But rising civilization, and above all the division of labor and its natural consequence, the gradual formation of cities inhabited by a population devoted primarily to industry, must everywhere have had the result of simultaneously diminishing the marketability of cattle and increasing the marketability of many other commodities, especially the metals then in use. The artisan who began to trade with the farmer was seldom in a position to accept cattle as money; for a city dweller, the temporary possession of cattle necessarily involved, not only discomforts, but also considerable economic sacrifices; and the keeping and feeding of cattle imposed no significant economic sacrifice upon the farmer only as long as he had unlimited pasture and was accustomed to keep his cattle in an open field. With the progress of civilization, therefore, cattle lost to
a great extent the broad range of marketability they had previously had with respect to the number of persons to whom, and with respect to the time period within which, they could be sold economically.”
What is important to take away from this is that money can be any good whose “exchange value” comes to exceed its “use value” for a given group of people in society. A consumption good can also be money, so long as some portion of a person’s total stock of the item has greater exchange value than use value. For instance, cigarettes in certain WWII POW camps, and in prisons, can serve as money. Even the prisoners who smoke, may acquire some cigarettes not for personal consumption, but for exchange -to serve as money.
Carl Menger On “Imaginary Value”
Carl Menger recognized that things could be regarded by people as valuable despite the fact that they did not, in reality, satisfy any human want or need:
“A special situation can be observed whenever things that are incapable of being placed in any kind of causal connection with the satisfaction of human needs are nevertheless treated by men as goods. This occurs (1) when attributes, and therefore capacities, are erroneously ascribed to things that do not really possess them, or (2) when non-existent human needs are mistakenly assumed to exist. In both cases we have to deal with things that do not, in reality, stand in the relationship already described as determining the goods-character of things, but do so only in the opinions of people.” https://competitionandappropriation.econ.ucla.edu/wp-content/uploads/sites/95/2020/12/Mengerprinciples.pdf
For Menger, the first category included things like: “…most cosmetics, all charms, the majority of medicines administered to the sick by peoples of early civilizations and by primitives even today, divining rods, love potions, etc.”
(I’d note that I don’t necessarily agree with some of the things Menger placed in this category. As noted, cosmetics make women more sexually attractive because they mimic sexual vitality. They serve a useful purpose for women looking to find and keep a husband.)
The second category included: “…medicines for diseases that do not actually exist, the implements, statues, buildings, etc., used by pagan people for the worship of idols, instruments of torture, and the like.”
For Menger: “Such things, therefore, as derive their goods-character merely from properties they are imagined to possess or from needs merely imagined by men may appropriately be called imaginary goods.”
It is possible that Bitcoin and other cryptocurrencies fall into the category of “imaginary goods”, and are nothing but a group delusion.
Can Cryptocurrency Like Bitcoin be Money?
Inherent in Carl Menger’s definition of money is that it must have some “use value” to someone. This is because a good only has “exchange value” to someone if it can ultimately be used by some other person willing to trade for it. For instance, cattle, in ancient times were ultimately used for meat and milk. If everyone became vegan overnight, then cows would have no use value. With the loss of that use value, they would lose all exchange value, because those who have no use value for the cattle themselves would not have a market to sell them into. The cattle would lose all marketability, and therefore have no exchange value.
This aspect of the Austrian theory of money means that if Bitcoin is to continue having exchange value over the long run, it must have some use value. (Otherwise, it is an imaginary value, and eventually, people will likely stop wanting to hold it as they realize this fact.)
So, what is the use value of Bitcoin?
I don’t have enough Engineering and Computer Science knowledge to understand Bitcoin, so I have not been able to answer this question to my own satisfaction.
Possible Use Value of Cryptocurrency
The only time I’ve seen anyone try to explain Bitcoin in terms of the Austrian theory of money is this article:
https://seanking.substack.com/p/bitcoin-does-have-intrinsic-value?s=r
I discovered it after I watched this debate: https://www.youtube.com/watch?v=dxzqMNuvHCI
Essentially, as I understand it, the article says that possessing bitcoin gives you the ability to write to a distributed database, which is held on all computers that participate in the blockchain. (Basically, all the computers engaged in bitcoin mining.)
If that is true, then bitcoin does have some use value. It gives you the ability to store some data on a distributed database of some sort.
But, this article doesn’t explain how bitcoin does this in terms that I can easily understand, so I am still not sure if this is right.
I would like someone who both understands the technology and the Austrian Theory of money to explain this to me in terms that a six-year-old can understand.
Conclusion
I think one of three things is true: (1) Either the Austrian Theory of Money is Wrong, (2) Bitcoin has some use value, or (3) Bitcoin is a group delusion, and will eventually go to zero market value.
I don’t know which is right at this point. I am uncertain.