Sunday, April 3, 2011
Pg. 207-211
Black continued to try and explain business cycles by attempting to explain why capital fluctuates. Black decided that instead of trying to explain fluctuation in terms of fluctuation in expected return (which was rejected immediately) or speculation, but because the world is non stationary. A non stationary world has a much wider range of possible futures, and prices are only the best estimates of value that we can have. Capital would fluctuate because of the expectations that future income will fluctuate, and new information would be constantly coming into the system. When he tried to publish this idea as an academic paper he was met with a lot of resistance, primarily because of the lack of "connection" with actual data. The theory that was accepted instead of Black's (even though it was similar in ways to his) was the hypothesis of rational expectations by Robert Lucas. This theory said that agents used the best knowledge available to them to make their decisions. The effect of this idea was that economists had to work out their ideas and theories with this new assumption.
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B for Braley. Where is the sense in this: "explain fluctuation in terms of fluctuation in expected return (which was rejected immediately) or speculation, but because the world is non stationary"?
ReplyDeleteAs a macroeconomist, I tried to slog through Black's stuff in 1989-90. I found it almost impossible to relate to. So, I'd emphasize that it he really wasn't speaking the right language to be understood, so I'm not even sure his ideas were correct.