Fischer Black used the Irving Fisher’s 1930 book in order to develop his theory of business cycles. As Fischer Black, Irving Fisher came to economics from mathematics and physics. This was one of the main reasons for which Fischer exploited his work.
According to Fisher, the actual value of the factory derived from the value of the goods it would produce in the future, linked to the rate of interest. Thus, the quintessential form of capital was the factory, in opposition to Fischer Black’s idea that it was the human being.
Consequently, according to Fischer, “an increase in wealth meant an increase in welfare”, which suggests that we should adopt economic policies that increase wealth. Later, in his wheat theory, Fischer stated that the rate of interest (or the realized return on the stock of capital) and the price of risk, both summarized production opportunities and investors’ preferences throughout the entire economy. However, this theory does not explain anything about unemployment, which is actually the main reason of business cycles in most people’s perceptions.
A for Tom.
ReplyDeleteThe book digresses into macro for a while here. There's been a lot of interaction between macro and finance over the last 35 years (as a macroeconomist, I see that as mostly a one-way street from macro to finance).
If you read between the lines here, he's doing "real CAPM" analogously to the way we do "real options": applying the technique to a different venue (business cycles).
It's also interesting that he views the main building block of growth as the person, rather than the piece of capital. That was a view no one in economics shared until after 1985 (and often much later).