# Irving Fisher

Irving Fisher

Irving Fisher (February 27, 1867 — April 29, 1947) was an American economist, one of the early American neoclassical economists. He contributed to the development of economics, using mathematical and statistical procedures, as well as developing theories from the Austrian school of economics. Several terms are named after him, including the “Fisher equation,” “Fisher hypothesis,” and “Fisher separation theorem.” His reputation was somewhat marred, however, by his own loss of fortune in the Stock Market Crash of 1929 and his continued pronouncements prior to the crash that stock prices were secure.

Fisher was not only an economic theorist who believed his work would serve to advance prosperity for all; he was also concerned about practical social issues, and promoting healthy living and world peace, an early advocate of the League of Nations.

### Life

Irving Fisher was born in Saugerties, New York. His father was a teacher and Congregational minister, who tried to bestow upon his son the belief that he must be a useful member of society. Already as a boy Irving a showed strong sense of right and wrong, and developed a deep relationship with God. He had 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 the "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 advisers 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 his 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 economics 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 served as president of American Economic Association in 1918, and in 1930, together with Joseph Schumpeter and Ragnar Frisch (1895-1973), he established 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 (later known as the rolodex), which he turned into a successful company business, making his fortune. Unfortunately, after the Stock Market Crash of 1929, his fortune was gone, and he spent the rest of his life in poverty. He did, however, continue to work and publish.

Fisher was also a social activist. He advocated for abstinence from alcohol and supported Prohibition. He also campaigned for the ban of tobacco and gave a series of lectures on public health. Already in 1915, he was a member of a group of people who lobbied for world peace and the creation of the League of Nations (which was created in 1919). He was greatly disappointed that the 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 support from his sister and her family. In 1940, his wife died, and in 1947, he developed cancer, from which he died on April 29 of that year, in New Haven, Connecticut.

## Work

Fisher's work on monetary economics was the main focus of his career. He 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, which laid the foundation for future monetary theory. 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:"

$M \cdot V = P \cdot T$

Later economists replaced the amorphous T with Q, real output, nearly always measured by real gross domestic product (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:

Fisher equation

$r_n = r_r + i$

where

$r_r$ is the real interest rate,
$r_n$ the nominal interest rate,
and $i$ the inflation rate.

Fisher hypothesis

Connected with this is his “Fisher hypothesis,” which 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, which are important variables for macroeconomics because they link the economy of the present and the economy of the future through their effects on savings 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, or 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, an early use of econometrics. 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 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 expressed 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 commodity available now has a different value than the same item 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, for example "apples" and "oranges."

Thus, Fisher defined capital as an asset that produces a flow of income over time. The value of this asset can then be calculated in terms of the net income it generates at the present time. Fisher's view of interest can be expressed as the interaction of two forces, the preference for immediate income as opposed to the potential income that could result from investment.

### Fisher separation theorem

Fisher also developed the "Fisher separation theorem," which 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." He showed this as follows:

1. The firm can make the investment decision—the choice between productive opportunities—that maximizes its present value, independent of its owner's investment preferences.
2. The firm can then ensure that the owner achieves his optimal position in terms of "market opportunities" by funding its investment either with borrowed funds, or internally as appropriate.

### Social engagement

Although Fisher left a significant mark in the sphere of economics, he did some additional work in the area of public health and eugenics, 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 a 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 dangers 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 a series of lectures on the need for the 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 world peace.

Fisher was also a supporter of eugenics, and 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 Crash, "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 the 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, however, made something of a comeback in the latter part of the twentieth century.

Overall, Fisher significantly contributed to the Neoclassical Marginalist Revolution. His several volumes on the theory of capital and investment introduced the Austrian school of economics into United States, pioneering new terms and concepts, like the “Fisher Separation Theorem” or difference between "stocks" and flows." Fisher also devised a new form of the “Fisher equation,” constructed the “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, became the canonical theory of capital and interest in 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. 1932. Booms and depressions: Some First Principles. Adelphi.
• 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

• Allen, R. L., 1993. Irving Fisher: A Biography. Blackwell Publishers. ISBN 1557863059
• BookRags.com. Irving Fisher. Retrieved on January 10, 2007.
• 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. & R. Rees. 2004. Microeconomics. 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. The New Palgrave: A Dictionary of Economics, Vol. 2. Palgrave MacMillan. ISBN 0935859101
• van Wijk Hans. 1997. Scholar in Pursuit of the Common Good. Retrieved on January 10, 2007. <>