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Fischer Black
From Wikipedia, the free encyclopedia.

Fischer Black (1938 - August 30, 1995) was an American economist, best known as one of the authors of the famous
Black-Scholes equation.

Black received a Ph.D. in Applied Math from Harvard University in 1964. In 1971 he began to work at the University of
Chicago. He later left the University of Chicago to work at the MIT Sloan School of Management. In 1984 he joined
Goldman Sachs.

Black began thinking seriously about monetary policy around 1970, and found at this time that the big debate in this field
was between Keynesians and monetarists. The Keynesians (under the leadership, at that moment, of Franco Modigliani)
believe there is a natural tendency of the credit markets toward instability, toward boom and bust, and they assign to both
monetary and fiscal policy roles in dampening down this cycle, working toward the goal of smooth sustainable growth. In
the Keynesian view, central bankers have to have discretionary powers to fulfill their role properly. Monetarists, under the
leadership of Milton Friedman, believe that discretionary central banking is the problem, not the solution. Friedman
believed that the growth of the money supply could and should be set at a constant rate, say 3% a year, to accomodate
predictable population growth, and that the central bank should become a boring administrative sort of place.

Where did Black come down on this argument? On the basis of the capital asset pricing model he concluded that
discretionary monetary policy can't do the good Keynesians want it to do. But he also concluded that it can't do the harm
monetarists fear it will do. The central bank is inefficacious, for good or ill. As Black put it in a letter to Friedman, in
January 1972, "In the U.S. economy, much of the public debt is in the form of Treasury bills. Each week, some of these
bills mature, and new bills are sold. If the Federal Reserve System tries to inject money into the private sector, the private
sector will simply turn around and exchange its money for Treasury bills at the next auction. If the Federal Reserve
withdraws money, the private sector will allow some of its Treasury bills to mature without replacing them."

So the central bank isn't the cause of, or the cure for, business cycles. But that then leads us into the question: what is the
cause of the business cycle? To what conclusion did CAPM lead Black on this point?

Writing in March 1976, he proposed that human capital and business have "ups and downs that are largely unpredictable
... because of basic uncertainty about what people will want in the future and about what the economy will be able to
produce in the future. If future tastes and technology were known, profits and wages would grow smoothly and surely
over time." A boom, then, is a period when technology matches well with demand. A bust is a period of mis-match.

This is how the two theories mesh. If Black is right about both issues, then during a boom, there will be plenty of room for
an expansion of credit -- and the increase in the money supply. (Black was thus reversing the arrow of causality proposed
by the monetarists.) During a bust, the decrease in price levels causes credit and the money supply to contract, via the
mechanism suggested in that 1972 letter to Friedman.

In early 1994, Black was diagnosed with throat cancer. Surgery at first appeared successful, and Black was well enough to
attend the annual meeting of the International Association of Financial Engineers that October, where he received their
award as Financial Engineer of the Year. But the cancer returned, and Black died in August, 1995.

He is also a co-author of the Black-Derman-Toy interest-rate derivatives model, which was developed for in-house use by
Goldman Sachs in the 1980s but eventually published.

Selected bibliography
Fischer Black and the Revolutionary Idea of Finance, by Perry Mehrling, published by Wiley, August 2005, £19.99 HB
available from [1] (

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Fischer Black - Wikipedia, the free encyclopedia

Fischer Black & Myron Scholes, The Pricing of Options and Corporate Liabilities, Journal of Political Economy 1973.

F. Black, E. Derman, & W. Toy, A One-Factor Model of Interest Rates and its Application to Treasury Bond Options,
Financial Analyst Journal (1990).

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Categories: 1938 births | 1995 deaths | American economists

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