Summarizing his view of the future, Fischer stated that "investors may decide to keep in stock the money they currently have in stocks".His rational was the efficient markets idea that return are independent random variables from one year to the next and the absence of explanation for a sure cause of the stagflation. Thus, for him, a past event would not be a good reason to believe it would occur again in the future
At that time, both Keynesians and monetarists visualized business cycles as short run deviations from long-run equilibrium. But Fischer came with the suggestion that economy could be understood as being in full general equilibrium all the time, with uncertainty (and not disequilibrium) causing business fluctuation. This concept in some extent was an extension of Irving Fisher's model of general equilibrium, with now the necessary analytical tools (CAPM) to treat uncertainty. For Fischer, the basic cause of business fluctuation was a mismatch between the pattern of production and the pattern of demand that could arise in equilibrium because of the very limited knowledge one shares about future events. Although, this way of thinking caused a lot of controversy ( theoreticians, MIT colleagues), Fischer was determined to develop his point further.
A for Tom.
ReplyDeleteAt the time described, there was 1) not much conception of mean reversion, and 2) no conception of business cycles as an equilibrium process (well, maybe a little, but it wasn't being published yet).
Yet, here is Fischer Black thinking about both. He thinks because there is mean reversion in stock returns, that you may as well keep your investments in stocks.
And here he is describing business cycles as a result of a mismatch between producers and consumers. The jury is still out on that approach, but it has been steadily gaining ground for 3 decades now.