Irving Fisher was an internationally renowned economist and statistician, known for his work on economic measurement and many other topics related to monetary and financial stability. He made important contributions to utility theory and general equilibrium. He was also a pioneer in the study of intertemporal choice in markets, which led him to develop a theory of capital and interest rates.

Fisher was one of the earliest American neoclassical economists, although his later work on debt deflation has been embraced by the post-Keynesian school of economics. His research on the quantity theory of money inaugurated the school of macroeconomic thought known as ‘monetarism’. According to James Tobin, who was an American economist and originator of the ‘Tobin tax’ on foreign exchange (FX) transactions: “Much of standard neoclassical theory today is Fisherian in origin, style, spirit and substance. In particular, most modern models of capital and interest are essentially variations on Fisher’s theme, the conjunction of intertemporal choices and opportunities. Likewise, his theory of money and prices is the foundation for much of contemporary monetary economics.”

Despite being eclipsed by British contemporary John Maynard Keynes during his lifetime, Fisher’s theoretical work was revived in the late 1950s and more recently due to an increased interest in debt deflation during the recent global financial crisis and recession. Keynes himself acknowledged that Fisher was the “great-grandparent” of his own theories on how monetary forces influenced the real economy.

### Early life

Fisher was born in Saugerties, New York on 27^{th} February 1867. He gained a diverse education at Yale, studying science and philosophy, but his greatest accomplishments were in mathematics and economics, the latter having no academic department at Yale. In spite of this, in 1891 Fisher earned the first PhD in economics ever awarded by Yale. His thesis, published by Yale in 1892 as ‘Mathematical Investigations in the Theory of Value and Prices’, was a rigorous development of the theory of general equilibrium. After graduation, he stayed at Yale for the remainder of his career.

He always sought to bring his analysis to life and to present his theories as lucidly as possible. For example, according to Tobin, to complement the arguments in his doctoral thesis Fisher produced a “remarkable hydraulic-mechanical analogue model of a general equilibrium system, replete with cisterns, valves, levers, balances and cams. Thus could he display physically how a shock to demand or supply in one of ten interrelated markets altered prices and quantities in all markets and changed the incomes and consumption bundles on the various consumers.”

In addition to his academic achievements, Fisher made several practical inventions, the most notable of which was an ‘index visible filing system’. He patented it in 1913 and sold it to Kardex Rand (later Remington Rand) in 1925. His concept eventually became the Rolodex system.

Through this invention, and his subsequent stock investments, Fisher became very wealthy, but his personal finances were wiped out by the stock market crash of 1929 and the subsequent Great Depression – as was his personal reputation. A few days before 24^{th} October 1929, dubbed ‘Black Thursday’, Fisher did something which economists should always think twice about: he made an economic prediction. He publicly proclaimed that stocks “have reached a permanent high plateau”. In addition he said 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.

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 swing, he did warn that the ongoing drastic deflation was the cause of the cascading insolvencies then dogging the American economy, because deflation increased the real value of debts fixed in dollar terms. Fisher was so discredited by his 1929 proclamations that few people took notice of his debt-deflation analysis.

Fisher was a committed health campaigner after a bout with tuberculosis in 1898, a disease that had killed his father and which nearly killed him. He was a proponent of vegetarianism and wrote the US best seller ‘How to Live: Rules for Healthful Living Based on Modern Science’. Fisher also supported the prohibition of alcohol and eugenics. He died in New York City in 1947, at the age of 80.

### Contributions to economics

According to French economist, Maurice Allais, Fisher “marks a decisive stage in the history of economic science. He was the first economist to combine profound theory and authoritative observation. He contributed powerfully to the construction of theoretical mathematical models aimed at the explanation of reality, and at the same time, whether in working out his assumptions or interpreting his results, he never lost his extraordinary preoccupation with reality, which he observed and analysed with a refined sense of the concrete.” Let’s look at his main contributions.

##### Use of mathematics in economics

Fisher must be considered one of those who laid the foundations of modern economics, particularly of econometrics. He contributed more than any other scholar to the introduction into economics of scientific methodology and mathematical thinking, and he played an essential role in the development of specific concepts and theories which lie at the base of today’s economics.

##### Theory of value and prices

In his PhD, ‘Mathematical Investigations in the Theory of Value and Prices’, Fisher’s aim was to present a general mathematical model of the determination of value and prices. It appears that Fisher had independently developed a theory of general economic equilibrium that was almost identical to French mathematical economist Léon Walras, and included the concept of the indifference surface, one of the fundamental bases of modern economic theory.

##### Capital and income

‘The Nature of Capital and Income’ contains the theoretical foundations of accounting science, both at the enterprise level and for the economy as a whole, as well as of actuarial science, within a general economic theory framework. In addition, Fisher presented a systematisation of the two concepts of capital and income, showing how these two concepts are linked through the rate of interest. Capital consists of a stock of goods; income is a flow of services. The value of capital is given by the present value of the future flow of income from it.

##### Monetary theory

In ‘The Purchasing Power of Money’ (1911), Fisher recasts the theory of money, giving a full demonstration of the principles that determine the purchasing power of money in the formal framework of the equation of exchange (MV + M’V’ = PQ) and applying these principles to the study of historical changes in purchasing power.

For Fisher, the purchasing power of money depends on five well-defined factors:

- The stock of money in circulation (M).
- Its velocity of circulation (V).
- The volume of deposits (M’).
- Their velocity of circulation (V’).
- The over-all volume of transactions.

##### Theory of interest

For Fisher, the rate of interest is governed by the balance between the supply of capital, as determined by the psychology of savers, and the demand for capital, as determined by the possibilities of, and the outlook for, investment. In ‘The Theory of Interest’ (1930a), Fisher distinguished two problems, namely, how the interest rate is determined and why it is always positive.

##### Monetary policy

Three of Fisher’s works are devoted to projects for monetary reform: ‘Stabilising the Dollar’ (1920), ‘Stamp Scrip’ (1933b), and ‘100% Money’ (1935). Fisher’s first book on monetary policy contains a plan for a reform of the gold standard, intended to stabilise purchasing power. The objective of Fisher’s stamped money plan was to furnish an efficient method of combating the hoarding of money, which has extremely injurious effects in a period of depression. Fisher’s aim in ‘100% Money’ was to show that economic fluctuations can be largely eliminated if demand deposits are totally backed by a corresponding amount of cash, thus depriving the banking system of its right to create money.

Following the stock market crash of 1929, and in light of the ensuing Great Depression, 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.

### In practice today

Fisher’s insights remain vital and have filtered, perhaps unconsciously, into the thinking of today’s policymakers.

In a 2009 Economist article, ‘Irving Fisher: out of Keynes’s shadow’, journalist Sue Vago wrote: “As parallels to the 1930s multiply, Fisher is relevant again. Fisher showed how such a spiral could turn mere busts into depressions.”

For example, in 1933 he wrote: “Over investment and over speculation are often important; but they would have far less serious results were they not conducted with borrowed money. The very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate…the more debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip.”

Vago argues that policymakers in America are applying his ideas, although they seldom invoke his name. “In academia Ben Bernanke, now Chairman of the Federal Reserve, sought to formalise Fisher’s debt-deflation theory. His research has shaped his response to this crisis. He decided to bail out Bear Stearns in March 2008 partly so that a sudden liquidation of the investment bank’s positions did not trigger a cycle of falling asset prices and default. Indeed, some say the Fed has learnt Fisher too well: from 2001 to 2004, to contain the deflationary shock waves of the tech-stock collapse, it kept interest rates low and thus helped to inflate a new bubble, in property.”