Everything about Irving Fisher totally explained
Irving Fisher (
February 27 1867 Saugerties, New York –
April 29 1947, New York) was an
American economist, health campaigner, and
eugenicist, and one of the earliest American
neoclassical economists and, although he was perhaps the first celebrity economist, his reputation today is probably higher than it was in his lifetime. Several concepts are named after him, including the
Fisher equation,
Fisher hypothesis and
Fisher separation theorem.
Biography
Early adulthood
Fisher's father was a teacher and Congregational minister, who raised his son to believe he must be a useful member of society. The young Irving had mathematical ability and a flair for invention. A week after he was admitted to
Yale University, his father died at age 53. Irving carried on, however, supporting his mother, brother, and himself, mainly by tutoring. He graduated from Yale with a B.A degree in
1888, where he was a member of
Skull & Bones.
Fisher's best subject was
mathematics, but
economics better matched his social concerns. He went on to write a doctoral thesis combining both subjects, on mathematical economics. Irving was granted the first Yale Ph.D. in economics, in
1891. His advisors were the physicist
Willard Gibbs and the economist
William Graham Sumner. Fisher didn't realise at the outset that there was already a substantial European literature on mathematical economics. Nevertheless, his thesis made a contribution European masters such as
Francis Edgeworth recognised as first rate. He constructed a wonderful machine of pumps and levers to complement and illustrate his thesis. While his books and articles on economic topics exhibited unusual (for the time) mathematical sophistication, Fisher always wished to bring his analysis to life and to present his theories in a very lucid manner.
This research into basic theory didn't touch the great social issues of the day. Monetary economics
did and this became the main focus of Fisher’s work. In the 1890s the United States was divided over the question of the monetary standard. Should the dollar float, be fixed in terms of gold or silver, or some combination of the two? To opt for one system was to choose between West and East, farmer and financier, debtor and creditor, …. Fisher’s
Appreciation and interest was an abstract analysis of the behaviour of interest rates when the price level is changing. It emphasised the distinction between real and monetary rates of interest which is fundamental to the modern analysis of inflation. However Fisher believed that investors and savers—people in general—were afflicted in varying degrees by “
money illusion”; they couldn't see past the money to the goods the money could buy. In an ideal world, changes in the price level would have no effect on production or employment. In the actual world with money illusion, inflation (and deflation) did serious harm.
Later life
Fisher was a prolific writer, producing journalism, as well as technical books and articles, addressing the problems of the First World War, the prosperous 1920s and the depressed 1930s. Fisher was an enthusiastic supporter of
Herbert Hoover.
Economic theories
Money and the price level
Fisher's theory of the price level was the following variant of the
quantity theory of money. Let
M=stock of money,
P=price level,
T=amount of transactions carried out using money, and
V= the velocity of circulation of money. Fisher then proposed that these variables are interrelated by the
Equation of exchange:
» MV=
PT.
Later economists replaced the amorphous
T with
Q, real output, nearly always measured by real
GDP.
Fisher was also the first economist to distinguish clearly between
real and
nominal interest rates:
»
where
r is the real interest rate, i is the nominal interest rate, and inflation is a measure of the increase in the price level. When inflation is sufficiently low, the real interest rate can be approximated as the nominal interest rate minus the expected
inflation rate.
The resulting equation bears his name.
For more than forty years, Fisher elaborated his vision of the damaging “dance of the dollar” and devised schemes to “stabilise” money, for example to stabilise the price level. He was one of the first to subject macroeconomic data, including the money stock, interest rates, and the price level, to statistical analysis. In the 1920s, he introduced the technique later called
distributed lags. In 1973, the
Journal of Political Economy reprinted his 1926 paper on the statistical relation between
unemployment and
inflation, retitling it as "I discovered the
Phillips curve".
Index numbers played an important role in his monetary theory, and his book
The Making of Index Numbers has remained influential down to the present day.
The theory of interest and capital
While most of Fisher's energy went into "causes" and business ventures, and the better part of his scientific effort was devoted to monetary economics, he's best remembered today for his theory of interest and capital, studies of an ideal world from which the real world deviated at its peril. His most enduring intellectual work has been his theory of
capital (economics),
investment, and
interest rates, first exposited in his
The Nature of Capital and Income (1906) and elaborated on in
The Rate of Interest (1907). His 1930 treatise,
The Theory of Interest, summed up a lifetime's work on
capital,
capital budgeting,
credit markets, and the determinants of
interest rates, including the rate of
inflation.
Fisher saw that subjective economic value isn't only a function of the amount of goods and services owned or exchanged but also of the moment in time when they're purchased. A good available now has a different value than the same good available at a later date; value has a time as well as a quantity dimension. The
relative price of goods available at a future date, in terms of goods sacrificed now, is measured by the
interest rate. Fisher made free use of the standard diagrams used to teach undergraduate economics, but labelled the axes "consumption now" and "consumption next period" instead of, for example, "apples" and "oranges." The resulting theory, one of considerable power and insight, was exposited in considerable detail in
The Theory of Interest; for a concise exposition, click
here.
This theory, since generalized to the case of
K goods and
N periods (including the case of infinitely many periods) using the notion of a
vector space, has become the canonical theory of capital and interest in contemporary economics; for an exposition see Gravelle and Rees (2004). The nature and scope of this theoretical advance wasn't fully appreciated, however, until Hirshleifer's (1958) reexposition, so that Fisher didn't live to see this theory's ultimate triumph.
Stock market crash of 1929
The stock market
crash of 1929 and the subsequent
Great Depression cost Fisher much of his personal wealth and academic reputation. He famously predicted, a few days before the
Stock Market Crash of 1929,
"Stock prices have reached what looks like a permanently high plateau." Irving Fisher stated on the 21st that the market was "only shaking out of the lunatic fringe" and went on to explain why he felt the prices still hadn't caught up with their real value and should go much higher. On Wednesday the 23rd, he announced in a banker’s meeting “security values in most instances were not inflated.” For months after the Crash, he continued to assure investors that a recovery was just around the corner. Once the
Great Depression was in full force, he did warn that the ongoing drastic
deflation was the cause of the disastrous cascading insolvencies then plaguing the American economy because deflation increased the real value of debts fixed in dollar terms. Fisher was so discredited by his 1929 pronouncements and by the failure of a firm he'd started that few people took notice of his "debt-deflation" analysis of the Depression. People instead eagerly turned to the ideas of
Keynes. Fisher's debt-deflation scenario has made something of a comeback since 1980 or so.
Personal ideals
The lay public perhaps knew Fisher best as a health campaigner and eugenicist. In
1898 he found that he'd
tuberculosis, the disease that killed his father. After three years in sanatoria, Fisher returned to work with even greater energy and with a second vocation as a health campaigner. He advocated vegetarianism, avoiding red meat, and exercise, writing
How to Live: Rules for Healthful Living Based on Modern Science, a USA best seller.
In
1912 he also became a member of the scientific advisory to the
Eugenics Record Office and served as the secretary of the
American Eugenics Society.
Fisher was also a strong believer in the now-ridiculed "focal sepsis" theory of physician
Henry Cotton, who believed that mental illness was attributable to infectious material residing in the roots of the teeth, recesses in the bowels, and other places in the human body, and that surgical removal of this infectious material would cure the patient's mental disorder. Fisher believed in these theories so thoroughly that when his daughter Margaret was diagnosed with Schizophrenia, Fisher had numerous sections of her bowel and colon removed at Dr. Cotton's hospital, eventually resulting in his daughter's death.
Fisher was also an ardent supporter of the Prohibition of alcohol in the United States, and wrote three short books arguing that Prohibition was justified on the grounds of both public health and hygiene, as well as economic productivity and efficiency, and should therefore be strictly enforced by American government.
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