In this essay, I continue to praise Perry Mehling’s biography of Fischer Black.

Thanks to an outstanding new intellectual biography by Perry Mehrling, I have been reminded of Fischer Black’s distinctive perspective on finance and economics. I want to use that perspective as the reference point for a series of essays on how capital markets and financial innovation affect the economy. There is a widespread but uninformed belief that modern financial markets create risk and moral hazard, with government regulation the necessary antidote. The reality, as Fischer Black understood, is more nearly the opposite.

If your inclination is to reject market theory any time you see a difference between theoretical ideals and actual markets, then Fischer Black is not for you.

When he was alive, I was among those economists who had difficulty accepting Black’s view of the economy as a whole. His ideas were very provocative, and they had solid internal logic. But Black’s theories sounded like they came from some other planet. An interesting planet to visit, certainly, this planet with perfect capital markets. But surely, the rest of us felt, no one would mistake Earth for the planet Fischer Black was describing.

For Discussion. Black might have argued that even if it is only an approximation, the assumption of perfect markets is the most logical approximation with which to start. Agree or disagree?