Business Cycles and Equilibrium

by Ken Black

Throughout his career Fisher Black has described a view of business fluctuations based on the idea that a well-developed economy will be continually in equilibrium. In the essays that constitute this book he explores this idea thoroughly and reaches some surprising conclusions. Provocative and clearly written, Business Cycles and Equilibrium will be of value to students of macroeconomics as well as those of finance and the international economy.

Genres: Economics, Finance, Nonfiction

Paperback

First published November 1, 1987

Reviews

[Max Lybbert · Rating 4 out of 5]

Fischer Black had a physics background, but ended up in finance. Black was careful to point out that he had no formal training in either finance or economics. But he made several important contributions to the field. He is the Black in Black-Scholes and Black-Litterman.

This book covers his view of banking and economics. He returned to the topic several years later in Exploring General Equilibrium. Black carefully presented his arguments.

Let us imagine, then, a world in which money does not exist.

The major financial institutions in this world are banks. ... Payments in this world are made by check. ... We might even imagine that checks have been replaced by an electronic payments mechanism; the discussion below would not be affected by this assumption.

Each bank is allowed to accept deposits under any conditions that is chooses to specify, and to pay any rate of interest on these deposits. ...

The banks will make loans to individuals, businesses, and governments. ... The banks will also probably set a maximum amount that they will lend to any individual, but this maximum is mainly to keep the borrower from running up a very large debt and then declaring bankruptcy. ...

An individual, business, or government will simply have an account at a bank; there will be no need to accounts with positive balances (deposits) and accounts with negative balances (loans). An individual may write a check that converts his deposit into a loan, or he may receive a salary payment that converts his loan into a deposit. ...

For the moment, let us suppose that all payments in this simpler world are handled by check or credit card, and that currency is not used. In this world, money does not exist (pg. 4-7).

Of course, the purpose of the thought experiment is to predict how the real world should act, assuming it follows our intuition of how the simpler world operates. Black is able to establish that the quantity of money should have no affect on the economy in general (the book was published at a time that Milton Friedman's monetarist views enjoyed a lot of support). He looks at exchange rates and purchasing power parity, and ends with a discussion of the cause of business cycles (people and businesses taking actions based on incorrect predictions) and noise ("[P]rices of goods and services contain noise introduced by the investment decisions of those who do not act rationally. I think this will change the character of the business cycles to some degree, perhaps making the fluctuations larger. ... But I don't think it creates an opportunity for the government to improve welfare in some sense").

I enjoyed another chance to see into Black's thoughts. His arguments are insightful, entertaining, and seem to me -- a nonspecialist -- to be sound.

[Zo · Rating 4 out of 5]

Provocative in the right sort of way, because it makes you think harder about how to argue that he is wrong. And I feel pretty sure he is wrong! I believe monetary/fiscal policy do affect business cycles, that thinking of the economy as continually in equilibrium is misguided, and that things like sticky prices/wages and other disequilibriating forces are pervasive. I think they key issue of disagreement between Black and the mainstream is not over "what goes wrong in the economy," but whether or not centrally guided policy can do anything to help when things go wrong. Black did push me in the direction of his view -- equilibrium forces are strong, don't expect easy fixes that imply arbitrage opportunities -- but I am still far from convinced. Now I just need to able to explain why (at an abstract level, something like coordination frictions and public goods issues seems the right way of explaining the utility of national business cycle policy -- no different from other justifications of government action).

[Dimitri Bianco · Rating 5 out of 5]

Great book on what causes business cycles. Fischer Black points out reasons why current monetary and fiscal economists are mislead and provides an alternative theory. The book is well written and is easy to read though the concepts can be hard to grasp since it is new and isn't taught this way in school. Overall very interesting if you are into economics and equilibrium models.

[Cameron Mitchell · Rating 5 out of 5]

A Brilliant book

I was aware of the stature of Mr. Black from a few sources. One personal and another in educational format. This is a collection of essays on topics ranging from finance to innovative ways to see economics, he is truly underrated and this book has a $1000 value for the transfer of knowledge
, nominally. If you have any comparative material, please let me know.