Irving Fisher

Irving Fisher (born February 27, 1867 — died April 29, 1947) was an American economist, one of the early American neoclassical economists, who significantly contributed to the Marginal Revolution. Several terms are named after him, including the “Fisher equation”, “Fisher hypothesis” and “Fisher separation theorem”.

Life

Irving Fisher was born in Saugerties, New York. His father was a teacher and Congregational minister, who tried to bestow into his son the belief that he must be a useful member of society. Already as a boy Irving showed strong sense of right and wrong, and developed a deep relationship with God. He had a good mathematical ability and a flair for inventing things. A week after he was admitted to Yale University, his father died at age 53. Fisher 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" society.

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, which resulted in his being granted the first Yale Ph. D in economics, in 1891. His advisors were the physicist Josiah Willard Gibbs and the economist William Graham Sumner.

After receiving his degree Fisher remained in Yale, where he taught mathematics as an assistant professor. In 1893 he married Margaret Hazard, a daughter from a wealthy family, and was able to travel to and spend several months in Europe. After the return in 1895, he transferred from the mathematics department to the department of political economy, and in 1898 became a full professor of economics.

In the following period of forty years, the time Fisher taught at the department of economic at Yale, he published numerous books and articles. Among the most influential were: The Nature of Capital and Income (1906), The Purchasing Power of Money (1911), The Making of Index Numbers (1922), The Theory of Interest (1930), and 100% Money (1935). He was the President of American Economic Association in 1918, and in 1930 he established, together with Joseph Schumpeter and Ragnar Frisch (1895-1973), the Econometric Society and became its first president (1931-33).

Beside his work as a scholar, Fisher was a successful businessman. In 1912 he invented and patented a card-indexing system, which he turned into a successful company business. In 1923 he established the Index Number Institute, which made and sold index numbers. Two years later he sold the operations to a company that became known as Remington Rand Company, the move which made Fisher a rich man. Unfortunately, after the market crash of 1929 his fortune was gone, and he spent the rest of his life in poverty. He however continued to work and publish.

Fisher was also a social activist. He advocated for the abstinence from alcohol and supported the Prohibition. He also campaigned for the ban of tobacco and gave series of lectures on public health. Already in 1915 he was a member of a group of people who lobbied for the world peace and the creation of the League of Nations (which was created in 1919). He was greatly disappointed that United States did not join the League, and that alcohol was legalized again in 1933.

Fisher retired from Yale in 1935, and continued to live on the support from his sister and her family. In 1940 his wife died, and in 1947 he developed a cancer, of which he died on April 29, in New Haven, Connecticut.

Work

The work on monetary economics was the main focus of Fisher’s career. 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 (1896) was an abstract analysis of the behavior of interest rates when the price level is changing. It emphasized the distinction between real and monetary rates of interest which is fundamental to the modern analysis of inflation.

Fisher made several important contributions to the Neoclassical Marginalist Revolution:

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 interest rate and nominal interest rate, concluding that the real interest rate equals the nominal interest rate minus the expected inflation rate. The resulting equation bears his name, and is as follows:

$r_{n}=r_{r}+i$

where $r_{r}$ is the real interest rate, $r_{n}$ the nominal interest rate, and $i$ the inflation rate.

Connected with this is his “Fisher hypothesis” that holds that the real interest rate is independent of monetary measures, especially the nominal interest rate. The application of this principle concerns the effect of money on interest rates. Interest rates are important variables for macroeconomists to understand because they link the economy of the present and the economy of the future through their effects on saving and investment.

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.

For more than forty years, Fisher elaborated his vision of the damaging “dance of the dollar” and devised schemes to “stabilize” money, i.e. to stabilize 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”.

He also suggested that 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. In his theory he used the "ideal" index, the geometric mean of the Paasche and Laspeyre indexes. In addition, Fisher suggested the policy of "100 percent money", according to which all bank deposits should be backed by 100 percent reserves, rather than fractional reserves.

The theory of interest and capital

While most of Fisher's energy was devoted to monetary economics, he is well remembered today for his theory of interest and capital, studies of an ideal world from which the real world deviated at its peril. Fisher was strongly influenced by the theories of John Rae (1796 – 1872) and Eugen von Böhm-Bawerk, and he greatly clarified the theories of those two economic legends.

Fisher’s most enduring intellectual work has been his theory of capital, investment, and interest rates, first exposited in his 1906 The Nature of Capital and Income and 1907 The Rate of Interest. 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 was the first to see 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 labeled the axes "consumption now" and "consumption next period" instead of, e.g., "apples" and "oranges."

Fisher separation theorem

The theorem asserts that the objective of a firm is to maximize its present value, regardless of the preferences of its owners. In addition, the investment decision is independent of the financing decision. The theorem therefore separates management's "productive opportunities" from the entrepreneur's "market opportunities". The firm can ensure that the owner achieves his optimal position in terms of "market opportunities", by funding its investments either with borrowed funds.

Social engagement

Although Fisher left significant mark in the sphere of economics, he did some additional work in the area of public health and eugenicist, as well as the advocacy for world peace. 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 book that became bestseller in the United States. Yet these activities led to his being dismissed as a crank in many circles, and probably weakened his authority as a serious economist.

Fisher wrote enthusiastically on the danger of tobacco and the condemnation of alcohol, and was an active supporter of Prohibition. He gave speeches on the importance of fresh air, exercise, and a proper diet, and would ask New York leading physicians to more actively publicize public health.

Fisher was a promoter of world peace. Already in 1915 he became a member of a group of intellectuals who propagated the idea of creating a League of Nations. When in 1919 the League was formed, he gave series of lectures on the need for United States join the League of Nations, and about the importance of world peace. In his 1923 book League or War, Fisher argues that America should become a leader of the free world, and that it is her responsibility to promote the world peace.

Fisher was a supporter of eugenics, and has co-founded in 1922 the "American Eugenics Society". The Society published material on immigration restriction and promoted the need to preserve the purity of the white race.

Legacy

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." 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.

Overall, Fisher significantly contributed to the Neoclassical Marginalist Revolution. His several volumes on the theory of capital and investment has introduced Austrian economical school into United States, pioneering new terms and concepts, like “Fisher Separation Theorem” or difference between "stocks" and flows". Fisher also devised a new form of “Fisher equation”, constructed “Fisher hypothesis” and the theory of index numbers. His theory of interest and capital, 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. The nature and scope of this theoretical advance was not fully appreciated, however, until Hirshleifer's (1958) re-exposition, so that Fisher did not live to see his theory's ultimate triumph.

In the sphere of his other work, his advocacy for the League of Nations helped in paving the way for the United Nations.

Publications

• Fisher, Irving. 1896. Appreciation and interest: A study of the influence of monetary appreciation and depreciation on the rate of interest with applications to the bimetallic controversy and the theory of interest.. New York: Macmillan
• Fisher, Irving. 1910. Introduction to Economic Science. The Macmillan Company
• Fisher, Irving. 1923. The Business Cycle Largely a `Dance of the Dollar'. Journal of the American Statistical Society. 18(144), 1024-1028.
• Fisher, Irving. 1923. League or War?. Harper & Brothers
• Fisher, Irving. June 1926. A statistical relation between unemployment and price changes. International Labour Review. Reprinted as "I Discovered the Phillips Curve", Journal of Political Economy, 81(2), 496-502.
• Fisher, Irving. 1927. A statistical method for measuring 'marginal utility' and testing the justice of a progressive income tax. In Jacob Hollander (Ed.) Economic Essays Contributed in Honor of John Bates Clark . The Macmillan Co.
• Fisher, Irving. 1930. The Stock Market Crash and After. The Macmillan Company
• Fisher, Irving. 1933. The debt-deflation theory of great depressions. Econometrica. 1, 337-57.
• Fisher, Irving. 1967 (original published in 1922). The Making of Index Numbers. Augustus M Kelley Pubs. ISBN 067800319X
• Fisher, Irving. 1982 (original published in 1907). The Rate of Interest. Garland Pub. ISBN 0824053141
• Fisher, Irving. 1996 (original published in 1935). 100% Money. Pickering & Chatto Ltd. ISBN 1851962360
• Fisher, Irving. 1996 (original published in 1930). The Theory of Interest. Pickering & Chatto Ltd. ISBN 1851962344
• Fisher, Irving. 1997 (original published in 1932). Booms and Depressions. Pickering & Chatto Ltd. ISBN 1851962352
• Fisher, Irving. 2003 (original published in 1906). The Nature of Capital and Income. Simon Publications. ISBN 1932512055
• Fisher, Irving. 2006 (original published in 1911). Elementary Principles of Economics. Cosimo Classics. ISBN 1596059338
• Fisher, Irving. 2006 (original published in 1892). Mathematical Investigations in the Theory of Value and Prices. Cosimo Classics. ISBN 1596059389
• Fisher, Irving. 2006 (original published in 1911). The Purchasing Power of Money: Its Determination and Relation to Credit, Interest, and Crises. Cosimo Classics. ISBN 1596056134
• Fisher, Irving & Fisk, Eugene. 1915. How to Live: Rules for Healthful Living based on Modern Science. Funk & Wagnalls

References

ISBN links support NWE through referral fees

• Allen, R. L., 1993. Irving Fisher: A Biography. Blackwell Publishers. ISBN 1557863059
• BookRags.com. Irving Fisher. Retrieved on January 10, 2007. <http://www.bookrags.com/Irving_Fisher>
• Fisher, Irving N. 1956. My Father Irving Fisher. Comet Press Books
• Fisher, Irving N. 1961. A Bibliography of the Writings of Irving Fisher. Yale University Library
• Gravelle, H., & Rees, R., 2004. Microeconomics, (Chapter 11). Pearson Education.. ISBN 0582404878
• Hirshleifer, Jack. 1958. The Theory of Optimal Investment Decisions. Journal of Political Economy 66, 329-352.
• Sasuly, Max. 1947. Irving Fisher and Social Science. Econometrica 15: 255-78.
• Schumpeter, Joseph. 2003. Ten Great Economists. Simon Publications. ISBN 1932512098
• Tobin, James. 1987. Fisher, Irving. In Eatwell, John (Ed.) The New Palgrave: A Dictionary of Economics, Vol. 2 (pp.369-76). Palgrave MacMillan. ISBN 0935859101
• van Wijk Hans. 1997. Scholar in pursuit of the common good. Speech delivered at the Inaugural Meeting of the Irving Fisher Committee, Istanbul. Retrieved on January 10, 2007. <http://www.ifcommittee.org/FisherBiogr.htm>

External links

• Irving Fisher – Biography at the Library of Economics and Liberty

• Irving Fisher (1867-1947) – Biography and major works

• Precedents for Defining Capital, - Article by Fisher, published in Quarterly Journal of Economics 18, 386-408.

• Is 'Utility' the Most Suitable Term for the Concept It is Used to Denote? – Article by Fisher, published in American Economic Review 8, 335-37, 1918

• Tobacco and Healthy Living – A chapter on tobacco from the book How to Live (1915), by Irving Fisher, Eugene L. Fisk

• Irving Fisher's Theory of Investment – Fisher’s theory on the New School for Social Research website

• Introduction to Eugenics - Irving Fisher and American Eugenics Society in the context of Eugenics movement

• Great Depression - Chronology of the Great Depression on PBS

Credits

New World Encyclopedia writers and editors rewrote and completed the Wikipedia article in accordance with New World Encyclopedia standards. This article abides by terms of the Creative Commons CC-by-sa 3.0 License (CC-by-sa), which may be used and disseminated with proper attribution. Credit is due under the terms of this license that can reference both the New World Encyclopedia contributors and the selfless volunteer contributors of the Wikimedia Foundation. To cite this article click here for a list of acceptable citing formats.The history of earlier contributions by wikipedians is accessible to researchers here:

• Irving_Fisher  ^history

The history of this article since it was imported to New World Encyclopedia:

• History of "Irving Fisher"

Note: Some restrictions may apply to use of individual images which are separately licensed.