Today I was going through some past editions of The Journal of Portfolio Management and stumbled across a special edition in memoriam of Fischer Black (1997).

In Remembering Fischer Black Jack Treynor writes:

It's easy to forget that over Fischer's career finance changed:

• From a verbal to a mathematical discipline.
• From accounting-centered to economics-centered.
• From suppressing uncertainty to giving it a central role.

Thirty years ago, nobody would have defined finance as the economics of uncertainty. Risk was a cop-out--for explaining why the future had departed from deterministic forecasts. Before the revolution, we regarded randomly fluctuating markets as evidence of irrationality of market prices. Now we view departures from random fluctuations as "anomalies."

In Fischer Black: Some Personal Memories Jonathan Ingersoll writes:

I first met Fischer Black in the summer of 1975 on the day I presented a paper to the faculity of the Graduate School of Business at the University of Chicago--an intimitating place to give a seminar. The people there are always prepared and ready to question your assumptions, your methodology, and your findings.

The paper was a theoretical and empirical analysis of dual-purpose funds using the Black-Scholes option pricing model. Both Myron and Fischer were then on the faculty at Chicago and in the audience. Fischer asked me how I might incorporate stochastic volatility into the model I'd developed.
It was a question for which I was not prepared. The Black-Scholes model did not have stochastic volatility. I had no idea how it might be incorporated into a theoretical pricing model. And the Black-Scholes model itself was still just a fledgling. It had been tested by the authors on OTC put and call data, but not yet empirically applied to any other type of claims. I'm sorry to say, Fischer, I had no answer for you that day in 1975. [...] Since the crash of 1987 and the subsequent growth in implied volatility smiles, the study of stochastic volatility has become something of a cottage industry among both academics and street practitioners who follow derivatives. But Fischer was there long before other were even aware that it was an issue.

This leaves me with two questions:

1. How would developed economies look like today in case no financial innovation would have been made over the last 50 years.
2. Could there be a severe economic crisis without any of those financial innovations (i.e. with consumers still levering up and believing that house prices will ever increase, greedy managers maximising short-term profits, etc.)

It's amazing that--given the current crisis--nobody thought it would be worth to come up with a general defense of financial innovations so far. Just to give an example: Most quants knew about the shortcomings of a given theoretical model. But given those limitations, they at least had a certain pricing tool and started to offer companies who did not want to take a directional risk the possibility to hedge* almost any exposure at more or less reasonable prices.

* ad counterparty risk: No, I don't think that in the larger picture AIG or LEH play such a big role. And lessons learned.