Economics Dictionary of ArgumentsHome
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| Regression Theorem: The Regression Theorem, developed by Ludwig von Mises, explains the origin of money's value. It states that money derives its current purchasing power from its historical use as a medium of exchange, which traces back to its initial value in barter as a commodity. This backward-looking logic underpins the acceptability of money in economic systems._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Murray N. Rothbard on Regression Theorem - Dictionary of Arguments
Rothbard III 267 Reggression theorem/money regression/cirularity/Rothbard: The seller’s marginal utility (..) depends on the previous existence of money prices for the various goods in the economy. Similarly, for the laborer, landowner, investor, or owner of a capital good: in selling his services or goods, money has a marginal utility of addition, which is a necessary prior condition to his decision to sell the goods and therefore a determinant in his supply curve of the good for money. And yet this marginal utility always depends on there being a previous array of money prices in existence. Rothbard III 269 Solution/Mises/Rothbard: The solution of this crucial problem of circularity has been provided by Professor Ludwig von Mises, in his notable theory of the money regression.(1) >Regression theorem/Mises, >Regress/Philosophy. Rothbard III 270 Rothbard: If prices today depend on the marginal utility of money today, the latter is dependent on money prices yesterday. Thus, in every money price in any day, there is contained a time component, so that this price is partially determined by the money prices of yesterday. This does not mean specifically that the price of eggs today is partially determined by the price of eggs yesterday, the price of butter today by that of yesterday, etc. On the contrary, the time component essential to each specific price today is the general array of yesterday’s money prices for all goods, and, of course, the subsequent evaluation of the monetary unit by the individuals in the society. If we consider the general array of today’s prices, however, an essential time component in their determination is the general array of yesterday’s prices. Rothbard III 271 This time component is purely on the money side of the determining factors. In a society of barter, there is no time component in the prices of any given day. When horses are being exchanged against fish, the individuals in the market decide on the relative marginal utilities solely on the basis of the direct uses of the commodities. These direct uses are immediate and do not require any previously existing prices on the market. Therefore, the marginal utilities of direct goods, such as horses and fish, have no previous time components. The case is different in a monetary economy. Solution/Rothbard: Now the question may be raised: Granted that there is no circularity in the determination of money prices, does not the fact that the causes partially regress backward in time simply push the unexplained components back further without end? If today’s prices are partly determined by yesterday’s prices, and yesterday’s by those of the day before yesterday, etc., is not the regression simply pushed back infinitely, and part of the determination of prices thus left unexplained? The answer is that the regression is not infinite, and the clue to its stopping point is the distinction just made between conditions in a money economy and conditions in a state of barter. Rothbard III 272 Money utility: the utility of money consists of two major elements: the utility of the money as a medium of exchange, and the utility of the money commodity in its direct, commodity use (such as the use of gold for ornaments). In the modern economy, after the money commodity has fully developed as a medium of exchange, its use as a medium tends greatly to overshadow its direct use in consumption. The demand for gold as money far exceeds its demand as jewelry. However, the latter use and demand continue to exist and to exert some influence on the total demand for the money commodity. The determination of money prices (gold prices) is therefore completely explained, with no circularity and no infinite regression. The demand for gold enters into every gold price, and today’s demand for gold, in so far as it is for use as a medium of exchange, has a time component, being based on yesterday’s array of gold prices. Rothbard III 273 This time component regresses until the last day of barter, the day before gold began to be used as a medium of exchange. On that day, gold had no utility in that use; the demand for gold was solely for direct use, and consequently, the determination of the gold prices, for that day and for all previous days, had no temporal component whatever.(2)(3) >Gold/Rothbard. 1. See Mises, Theory of Money and Credit, New Haven, Conn.: Yale University Press, 1953 and 1957. Reprinted by Liberty Fund, 1995. pp. 97-123 , and Human Action, New Haven, Conn.: Yale University Press, 1949. Reprinted by the Ludwig von Mises Institute, 1998. pp. 405-08. Also see Schumpeter, History of Economic Analysis, New York: Oxford University Press, [1954] 1996. p. 1090. This problem obstructed the development of economic science until Mises provided the solution. Failure to solve it led many economists to despair of ever constructing a satisfactory economic analysis of money prices. They were led to abandon fundamental analysis of money prices and to separate completely the prices of goods from their money components. In this fallacious course, they assumed that individual prices are determined wholly as in barter, without money components, while the supply of and the demand for money determined an imaginary figment called the "general price level." Economists began to specialize separately in the "theory of price," which completely abstracted from money in its real functions, and a "theory of money," which abstracted from individual prices and dealt solely with a mythical "price level." The former were solely preoccupied with a particular price and its determinants; the latter solely with the "economy as a whole" without relation to the individual components - called "microeconomics" and "macroeconomics" respectively. Actually, such fallacious premises led inevitably to erroneous conclusions. It is certainly legitimate and necessary for economics, in working out an analysis of reality, to isolate different segments for concentration as the analysis proceeds; but it is not legitimate to falsify reality in this separation, so that the final analysis does not present a correct picture of the individual parts and their interrelations. 2. As we regress in time and approach the original days of barter, the exchange use in the demand for gold becomes relatively weaker as compared to the direct use of gold, until finally, on the last day of barter, it dies out altogether, the time component dying out with it. 3. It should be noted that the crucial stopping point of the regression is not the cessation of the use of gold as “money,” but the cessation of its use as a medium of exchange._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
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> Counter arguments against Rothbard
> Counter arguments in relation to Regression Theorem
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