When Robert Schiller was awarded the near-Nobel for economics there was also a tacit blessing that the limits of economics as a science were being recognized. You see, Schiller’s most important contributions included debunking the essentials of market behavior and replacing it with the irrationals of behavioral psychology.

Schiller’s pairing with Eugene Fama in the Nobel award is ironic in that Fama is the father of the efficient market hypothesis that suggests that rational behavior should overcome those irrational tendencies to reach a cybernetic homeostasis…if only the system were free of regulatory entanglements that drag on the clarity of the mass signals. And all these bubbles that grow and burst would be smoothed out of the economy.

But technological innovation can sometimes trump old school musings and analysis: BitCoin represents a bubble in value under the efficient market hypothesis because the currency value has no underlying factual basis. As the economist John Quinnen points out in The National Interest:

But in the case of Bitcoin, there is no source of value whatsoever. The computing power used to mine the Bitcoin is gone once the run has finished and cannot be reused for a more productive purpose. If Bitcoins cease to be accepted in payment for goods and services, their value will be precisely zero.

In fact, that specific computing power consists of just two basic functions: substitution and permutation. So some long string of transactions have all their bits substituted with other bits, then blocks of those bits are rotated and generally permuted until we end up with a bit signature that is of fixed length but that is statistically uncorrelated with the original content. And there is no other value to those specific (and hard to do) computations.… Read the rest