Editing Fischer Black (section)

==Economic career==

Black began thinking seriously about [[monetary policy]] around 1970 and found, at this time, that the big debate in this field was between [[Keynesian]]s and [[monetarist]]s. The Keynesians (under the leadership 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 damping 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 accommodate predictable growth in real GDP.

On the basis of the [[capital asset pricing model]], Black concluded that discretionary monetary policy could not do the good that Keynesians wanted it to do. He concluded that monetary policy should be passive within an economy. But he also concluded that it could not do the harm monetarists feared it would do.  Black said in a letter to Friedman, in January 1972:

{{blockquote|''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.''}}

In 1973, Black, along with Myron Scholes, published the paper 'The Pricing of Options and Corporate Liabilities' in [[Journal of Political Economy|''The Journal of Political Economy'']].<ref>{{Cite journal|last1=Black|first1=Fischer|last2=Scholes|first2=Myron|date=1973|title=The Pricing of Options and Corporate Liabilities|journal=Journal of Political Economy|volume=81|issue=3|pages=637–654|jstor=1831029|doi=10.1086/260062|s2cid=154552078}}</ref> This was his most famous work and included the Black–Scholes equation.

In March 1976, Black 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 is a period when technology matches well with demand. A bust is a period of mismatch.  This view made Black an early contributor to [[real business cycle theory]].

Economist [[Tyler Cowen]] has argued that Black's work on monetary economics and business cycles can be used to explain the [[Great Recession]].<ref name=Cowen>{{cite journal|last1=Cowen|first1=Tyler|title=A Simple Theory of the Financial Crisis or, Why Fischer Black Still Matters|journal=Financial Analysts Journal|date=June 4, 2009|volume=65|issue=3|pages=17–20|doi=10.2469/faj.v65.n3.3|ssrn=1414440|s2cid=153838799|quote=Most business cycle analysts offer detailed scenarios for how things go wrong, but Black's revolutionary idea was simply that we are not as shielded from a sudden dose of bad luck as we would like to think.}}</ref>

Black's works on monetary theory, business cycles and options are parts of his vision of a unified framework. He once stated: {{blockquote|I like the beauty and symmetry in Mr. Treynor's equilibrium models so much that I started designing them myself. I worked on models in several areas: }}{{blockquote|Monetary theory, Business cycles, Options and warrants}}{{blockquote|For 20 years, I have been struggling to show people the beauty in these models to pass on knowledge I received from Mr. Treynor.}}{{blockquote|In monetary theory --- the theory of how money is related to economic activity --- I am still struggling. In business cycle theory --- the theory of fluctuation in the economy --- I am still struggling. In options and warrants, though, people see the beauty.<ref name=":0" />}}It can be shown that the mathematical techniques developed in the option theory can be extended to provide a mathematical analysis of monetary theory and business cycles as well.<ref>{{Cite book|title = The Unity of Science and Economics: A New Foundation of Economic Theory|last = Chen|first = Jing|publisher = Springer (2015)}}</ref>