April 25, 2020
Irving Fisher is a world renowned American economist who has greatly contributed to the discipline of economics. To others, he is one of the greatest mathematical economists whose writings are one of the clearest. He also considered as one of the first neoclassical economists and an inventor. He was categorized under the Post-Keynesian school when he later on worked on the debt deflation theory (Irving Fisher, 1916). He founded several agencies and associations. It is also true to note that his other contributions as a eugenicist and a health campaigner. Through his life, as much as he managed to command a great reputation, his public statements could not help but paint a bad image about him. By all standards Irving Fisher was and is still a very important figure in relation to his contributions to economics in terms of the principals and theories that he developed.
Irving Fisher’s Principals and Theories
Irving Fisher was so intelligent that he used mathematics in almost all his theories and various principals (Irving Fisher, 1916). Fisher’s principals form the basis of the contemporary economic models of capital and interest. Monetarism was also derived from his principals of money and prices. It is considered as a more modern quantity theory of money.
Among the concepts that were named after Fisher include: Fisher separation theorem, Fisher equation, Fisher hypothesis and the international Fisher effect.
Theory of the Price Level
This theory was derived from the quantity theory of money. He used various variables such as M, P, T and V to represent stock of money, price level, amount of transactions and the velocity of money’s circulation respectively. He developed an equation to consist of all these variables and named it the equation of exchange.
Currently, modern economists have introduced real income in place of the total volume of transactions (T) as much as they still use the same basic equation. The equation is very instrumental in examining the consistency of someone’s line of thought in relation to a country’s economy. As an economist, Fisher was the first one to draw a clear line between nominal and real interest rates. When these two variables were combined with inflation, it resulted into the famous Fisher equation that was named after him. In the event that inflation becomes very low then the real interest rate almost equals the nominal interest rate less the inflation rate that is expected at the time.
For a long time, Fisher held on to his vision which was to stabilize the price levels through his own devised schemes.
Theory of Interest and Capital
Econlib (2002) reveals that Fisher dedicated part of his efforts to monetary economics leading to the development of this particular theory. This kind of contribution is what associated him with the neoclassical economics. His books especially the one on the theory of interest was so articulate to the point that half of it was easily understood by his students in a single sitting. He later developed theories on capital development and interest rates. These theories had close relations to such aspects as credit markets, capital budgeting, inflation, interest rates and capital in general. He described capital as an asset that was capable of bringing forth a flow of revenue over a period of time.
From his capital theory’s point of view, Fisher preferred a tax on consumption model over the conventional income taxation. Fisher did not see the sense of saving from the current income then investing the savings on capital commodities that are expected to yield returns at a later date (Irving Fisher, 2007). A clear observation is double taxation on both income used for the purchase of goods and the income that will be produced by the capital. The capital theory in light of this reasoning is in use today by economists.
He discovered and therefore revealed that subjective economic value is a function of both amount and time when goods and services are purchased. He argued that a particular commodity will have different values at different times of purchase. This observation means that value has quantity and time as its two major dimensions. The interest rate determines the relative price of a commodity in relation to the time of purchasing it.
Fisher made tremendous efforts to even incorporate diagrams when teaching his students. This particular theory has been widely adapted such that it has become a standard theory.
The theory of economic crises
Fisher referred to this theory as the Debt-Deflation theory of Great Depressions. He argued that a country’s economic crisis occurred when it burst its credit bubble. The theory describes a number of effects that are normally associated with this particular circumstance. The effects include: reduction in the level of profits; loss of confidence coupled with pessimism; a fall in output, employment and trade; decreased prices of assets; liquidation of debts; money hoarding and reduced nominal interest rates coupled with affected interest rates due to deflation (Irving Fisher, 2007).
Fisher’s reputation contributed to the preference of Keynesian economics over this theory before the 1980’s. A memorable occasion was when he argued that the Great depression could be fixed. Its popularity picked up later and it has since been one of the main theories when it came to economics.
Importance of Irving Fisher
Irving Fisher is very important because he dedicated a great deal of his life to make various contributions in different capacities. He is considered as one of the major contributors of the economics of the 20th century. To date, economists have always acknowledged his works. He served in the capacity as an economist, commentator on public events, statistician, and a lecturer among others. He put to task his critical, analytical and intelligent personality to come up with various economic theories that have been used for a long time.
According to Econlib (2002), these theories have also been used to derive other economic theories, principals and concepts that are very vital in decision making. He has also written books on various topics including mechanics, astronomy and poetry. In relation to his tuberculosis illness, he wrote a book on how to live a healthy life on the basis of modern science. His writings went a long way to enlighten people in their various areas of interest thus highlighting his importance in the society. He offered employment to people in his firm which later merged with its rival to establish an even more successful firm.
His extensive knowledge in advanced mathematics led to his numerous contributions including the introduction of the Phillips curve; articles on theory of capital and investment; Walrasian theory of equilibrium price; introduction of the distinction between flows and stocks; the theory of index numbers and the development of the debt-deflation theory (Econlib, 2002).
Importance of Irving Fisher’s Theories
Fisher’s theories are very important because they have either been applied or used to develop other theories and principals by economists. Modern day economists or rather neoclassical economists have faced many challenges in this field such that they had to consult Fisher’s theories (Bookrags, 2011). A typical example of this scenario is when it comes to the Great Depression which contributed to a period when Fisher’s reputation was greatly damaged. Many arguments were raised in relation to the challenges facing the country’s economy. Serious policy mistakes were pointed out.
It was only until when the economists took a closer look at the relevant theory that they realized how Fisher had an innovative and at the same time a comparatively different point of view. Lessons from the great depression have enhanced effective studies on market meltdowns. As the country undergoes tragic events relating to the debt-deflation mechanism one cannot help but acknowledge that Fisher was right as compared to what other economists have developed.
Fisher’s theories have also been applied in various situations as guiding policies. This means that his works still stand out. The debt-deflation theory encourages stopping of deflation in addition to restarting a comprehensive credit system. The level of debt in the country stands at 190% of GDP (Bookrags, 2011). This has been due to reduced output and deflation. Recession on the other hand has affected home prices.
Other outcomes include low wages and rise in prices of properties. A counter measure to the later effect would be to allow for the price of the properties to fall in order to strike a balance. To attain a solution to this stalemate economists are forced to consider Fisher’s relevant theories. This initiative will definitely result into a step or two towards financial stabilization. These theories are known to prompt a prevention mechanism before the destructive effects of an eminent catastrophe are felt. This move involves careful thinking and identification of where the problem started and then sealing the loopholes. This will help in securing financial assets thus enhancing the efficiency of the entire financial system.
Irving Fisher (2007) asserts that central banks across the globe employ the policy of price stabilization thanks to Fisher’s contributions. This policy can be traced back to his book “The making of Index Numbers” when he devised a mechanism to use index numbers. Both practicing economists and pundits in the economic school of thought regularly refer to his theoretical works since it covers almost all major macroeconomic issues under the sun. Fisher’s theories are usually brought to life every time a similar situation arises. A typical example was when Barrack Obama announced the country’s economic crisis. Lessons were quickly drawn from the Great Depression catastrophe.
It is understood that as the great depression affected the economy, Fisher worked to develop the debt-deflation theory. The theory was instrumental to influence President Roosevelt’s move to devalue the dollar despite his damaged reputation that saw his fellow economists looking down upon him. His critics despised his hypothesis arguing that since the rise of real debt would result into worsening the situation for debtors and doing the opposite for creditors, then the theory was useless. They mentioned that the two opposite effects would cancel out resulting into a nil situation. The debt situation today in America stands at a higher level as compared to 1933 (Bookrags, 2011). This can be attributed to high levels of borrowing.
Implications on the economy
Bookrags (2011) reveals that Fisher’s theories have helped the American economy in a positive way. The reason to this argument is the fact that his reputation has really grown today as compared to the time when he was alive. His theories and principals have been adopted in such a way that many vital concepts that have been applied to restore the country’s economy have been named after him. This is a gesture to show the success of an inventor.
Many lessons have been drawn from the great depression in relation to the current economic situation. The lessons evoke further research and a clear understanding of the current situation meaning that his theories have helped the current situation to a great extend. Human beings are known to learn from mistakes. Fisher made a notable mistake when he ruled and advised about the great depression. His argument was misleading (Econlib, 2002). This automatically prompts a reaction to avoid making such a mistake again. Further research has been done on existing theories. Some theories have been modified to suit the situation.
Economic Plan for America’s Economy
If Irving Fisher was alive today then he would have adopted his debt-deflation theory in a bid to avoid deflation and instead concentrate on the inside debt as mentioned earlier in the paper. The economic plan would therefore be aimed at getting the country back to its feet as soon as possible without further consequences. This means that the economic plan would therefore be in line with this theory. This is evident by the fact that modern policy makers are presently using his ideas as much they do not invoke him. It does not come as a surprise when the Federal Reserve chairman spearheaded the move to establish a formalized debt-deflation theory (Econlib, 2002).
The fact that Fisher’s theories are still in use in his absentia only means that he would have also used his own inventions only that he would have easily modified them to effectively suite the current situation.
Irving Fisher would only agree to those policies that are either similar or those that seek to build on his theories. It is natural that he would be very careful to avoid a situation that would damage his reputation like during the great depression. If current policies were different to his theories, it is likely that he would be a bit flexible to even consult before rushing into any decision.
Irving Fisher was truly a successful inventor. His articulate, clear and comprehensive contributions in terms of teaching, books, articles, theories, principals, concepts and ideas have really enhanced making of wise decisions relating to the economy for instance. Fisher’s contributions can therefore not be matched by those of his contemporaries.
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