IRVING FISHER

February 27, 1867 -- April 29, 1947

 IRVING FISHER
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 did
not 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 did not 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 could not 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.
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 y
or "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, i.e. 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 is 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, 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 is not
only a function of the amount of goods and
services owned or exchanged but also of the
moment in time when they are 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, e.g.,
"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
was not fully appreciated, however, until
Hirshleifer's (1958) reexposition, so that Fisher did
not live to see this theory's ultimate triumph.

Debt-Deflation:

Following the stock market crash of 1929 and the

ensuing Great Depression, Fisher developed a
theory called debt-deflation. According to the
debt deflation theory, a sequence of effects of the
debt bubble bursting occurs:
1.Debt liquidation and distress selling.
2.Contraction of the money supply as bank loans
are paid off.
3.A fall in the level of asset prices.
4.A still greater fall in the net worth of
businesses, precipitating bankruptcies.
5.A fall in profits.
 6.A reduction in output, in trade and in
employment.
7.Pessimism and loss of confidence.
8.Hoarding of money.
9.A fall in nominal interest rates and a rise in
deflation adjusted interest rates.

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 October 21 that the market was
"only shaking out of the lunatic fringe" and went on
to explain why he felt the prices still had not
caught up with their real value and should go much
higher. On Wednesday, October 23, 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
had 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 had 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 Fisher 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.

Selected publications:
• Primary

○ 1892. Mathematical Investigations in the Theory

of Value and Prices.
○ 1896. Appreciation and interest.
○ 1906. The Nature of Capital and Income.
○ 1907. The Rate of Interest.
○ 1910. Introduction to Economic Science.
○ 1911. The Purchasing Power of Money: Its
Determination and Relation to Credit, Interest,
and Crises.
○ 1911. Elementary Principles of Economics.
○ 1915. How to Live (with Eugene Lyon Fisk).
○ 1921, The best form of index number, American
Statistical Association Quarterly.
○ 1922. The Making of Index Numbers.
○ 1923, "The Business Cycle Largely a `Dance of
the Dollar'," Journal of the American Statistical
Society.
○ 1926, "A statistical relation between
unemployment and price changes," International
Labour Review.
○ 1927, "A statistical method for measuring
'marginal utility' and testing the justice of a
progressive income tax" in Economic Essays
Contributed in Honor of John Bates Clark .
○ 1930. The Stock Market Crash and After.
○ 1930. The Theory of Interest.
○ 1932. Booms and Depressions.
○ 1933, "The debt-deflation theory of great
depressions," Econometrica.
○ 1933. Stamp Scrip.
○ 1935. 100% Money.