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Irving Fisher

Irving Fisher was an American economist, inventor, social campaigner. He was one of the earliest American neoclassical economists, though his later work on debt deflation has been embraced by the Post-Keynesian school. Fisher made important contributions to utility theory and general equilibrium. He was also a pioneer in the rigorous study of intertemporal choice in markets, which led him to develop a theory of capital and interest rates.

Background

  • Fisher, Irving was born on February 27, 1867 in Saugerties, New York, United States. Son of Review George Whitefield and Ella (Wescott) Fisher.

  • Education

    • He studied science and philosophy at Yale, where he was most interested in mathematics and economics (he had shown particular talent and inclination for mathematics, but found that economics offered greater scope for his ambition and social concerns) but at the same time he published poetry and worked on astronomy, mechanics, and geometry. Despite the fact that Yale did not have an Economics Department at that time, Fisher continued studying this science and earned the first Ph.D. in economics ever awarded by Yale.

      After his graduation, he studied in Berlin and Paris.

    Career

    • Fisher stayed for his whole career at Yale. Nevertheless, he never forgot his other interests: due to developing and surviving tuberculosis in his early 30s Fisher had a great interest in health and hygiene. He wrote a national best-seller titled "How to Live: Rules for Healthful Living Based on Modern Science".

      But first of all Fisher was one of America’s greatest mathematical economists and one of the clearest economics writers of all time. He had the intellect to use mathematics in virtually all his theories and the good sense to introduce it only after he had clearly explained the central principles in words. And he explained very well: Fisher's Theory of Interest is written so clearly that graduate economics students, who still study it today, often find that they can read and understand half the book in one sitting. With other writings in technical economics, this is unheard of. He was the founder and president of both the Econometric Society and the American Economic Association. Fisher was also an inventor. His company merged with another to form Remington Rand, which was later known as Sperry Rand. This merger made his a very wealthy man. However, he lost a great deal of this wealth in the stock market crash of 1929 and damaged his reputation by insisting throughout the Great Depression that recovery was imminent. But in spite of the fact, contemporary economic models of interest and capital are based on Fisher’s principles of money and prices, as well as monetarism is.

      Fisher developed a theory of economic crises called debt-deflation, which attributed the crises to the bursting of a credit bubble. According to Fisher, the bursting of the credit bubble unleashes a series of effects that have serious negative impact on the real economy:

      • debt liquidation and distress selling;

      • contraction of the money supply as bank loans are paid off;

      • a fall in the level of asset prices;

      • a still greater fall in the net worth of businesses, precipitating bankruptcies;

      • a fall in profits;

      • a reduction in output, in trade and in employment;

      • pessimism and loss of confidence;

      • hoarding of money;

      • a fall in nominal interest rates and a rise in deflation-adjusted interest rates.

      This theory was largely ignored in favor of Keynesian economics, in part because of the damage to Fisher's reputation caused by his public optimism about the stock market, just prior to the crash. Debt-deflation has experienced a revival of mainstream interest since the 1980s, and particularly with the Late-2000s recession, and is now the major theory with which Fisher's name is associated.

      Fisher's research into the basic theory of prices and interest rates did not touch directly on the great social issues of the day. On the other hand, his monetary economics did and this grew to be the main focus of Fisher’s mature work.

      It was Fisher who formulated the quantity theory of money in terms of the "equation of exchange": Let M be the total stock of money, P the price level, T the amount of transactions carried out using money, and V the velocity of circulation of money, so that MV=PT. 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.

      Irving Fisher was very influential in a variety of areas. One particular area was his development of index numbers - a mathematical technique that is invaluable in economics. Index numbers that we use today include the FTSE index to measure share values and the RPI to measure inflation.

      Fisher is probably best remembered today in neoclassical economics for 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 research into capital, capital budgeting, credit markets, and the factors (including inflation) that determine interest rates.

      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 labeled the axes "consumption now" and "consumption next period" (instead of the usual schematic alternatives of "apples" and "oranges"). The resulting theory, one of considerable power and insight, was presented in detail in "The Theory of Interest".

    Major achievements

    • His research on the quantity theory of money inaugurated the school of macroeconomic now known as "monetarism". He stressed the evils of unstable price levels and for some years campaigned vigorously for the adoption of a "compensated dollar" with a varying gold content, as a means of preventing extreme price-level changes. Fisher also advocated the adoption of the 100 percent money system, whereby banks are required to maintain a reserve of actual money of 100 percent of deposits subject to check. In addition, he made extensive investigations of problems relating to the definition and use of index numbers.

      One more fact worth mentioning is that Fisher also campaigned for world peace, healthy eating and a healthy lifestyle and was often regarded by his colleagues as something of an eccentric. His influence waned towards the end of his career, but he left behind a legacy of theory that is still very important to people all over the world.

      James Tobin and Milton Friedman called Fisher "the greatest economist the United States has ever produced".

    Works

    • 100% Money and the Public Debt
    • Article by Irving Fisher (1936), Professor Emeritus of Economics, Yale University, urges Congress to take back the Constitutional money power, redeem the national debt, require banks' demand deposit to be 100% liquid, to avoid an inelastic loan structure that bursts, leaving frozen loans behind, and avoid 'Global Financial Crises'.

    Religion

    Denomination: Congregational

    Membership

    Member of Theodore Roosevelt’s National Conservation Commission. Member of editorial board of Econometrics. Member of Phi Beta Kappa, Sigma Chi.

    Royal Economics Society, Connecticut Academy Arts and Sciences, American Academy Political and Social Science, American Statistical Association, American Ethnographical Society, N.E. Free Trade League, International Free Trade League, National Association Study and Prevention Tuberculosis, American Association for Study and Prevention Infant Mortality, National Consumers League, League of Nations Association, American Philosophical Society, Reale Accademia dei Lincei (Rome), Institut International Statisque, Norwegian. Academy of Science and Letters, Instituto Lombardo (Milan, Italy), Committee for the Nation. Club: Cobden (honorary), Civic, Yale, Reform (New York).

    Connections

    • Married Margaret, d. Children: Margaret (deceased).
    • father: Review George Whitefield Fisher
    • mother: Ella (Wescott) Fisher
    • spouse: Margaret
    • child: Margaret Fisher (deceased)
    Irving Fisher
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    Born February 27, 1867
    Died April 29, 1947
    (aged 80)
    Nationality
    • 1888
      Yale University
    • 1891
      Yale University
    • 1892 - 1895
      Professor of mathematics, Yale University
    • 1895 - 1935
      Professor of Economics, Yale University
    • 1918 - 1918
      President, American Economic Association
    • 1922 - 1922
      Co-Founder, American Eugenics Society
    • 1931 - 1933
      President, Econometric Society
    • 1932 - 1932
      President, American Statistical Association

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