ADVERTISEMENTS:

**In this article we will discuss about Irving Fisher (1867-1947):- 1. History of Irving Fisher 2. Economic Ideas of Irving Fisher 3. Critical Appraisal. **

**History of Irving Fisher: **

Schumpeter called Irving Fisher the greatest economist of America in his “Ten Great Economists”. Irving Fisher was a mathematician, statistician, reformer and a teacher. He was a man of diverse interests. He took active part in several activities like campaign for prohibition, public health, healthy living etc.

He was a great mathematician and used extensively mathematics in economics. His doctoral dissertation was “Mathematical Investigation in the Theory of Value and Price”, published in 1892. Fisher was born in Saugerties (New York).

ADVERTISEMENTS:

He was educated at Yale, Berlin and Paris. In 1893 he left for Europe for his higher studies in Mathematics. After his return, he taught mathematics for some-time at the Yale University. From 1895 onwards he was appointed as Professor of Economics.

**Fisher’s other writings include: **

The Nature of Capital and Income (1906) The Rate of Interest (1907), The Purchasing Power of Money (1911), Elementary Principles of Economics (1910), The Making of Index Numbers (1922), The Money Illusion (1928), The Theory of Interest (1930), Booms and Depressions (1932), Stable Money (1934) and 100 percent Money (1935). Fisher’s main contributions are in the fields of money, interest and capital. He was the first economist who said that income should not be confused with capital.

**Economic Ideas of ****Irving Fisher: **

**Irving Fisher:**

**The following are the main economic ideas of Fisher: **

**1. Theory of Demand:**

ADVERTISEMENTS:

In his theory of demand, Irving Fisher adopted a cardinal utility analysis. Like Edgeworth, he also developed the concept of indifference curves. He drew price and income lines. He also mentioned about superior and inferior goods and the substitutability and complementarity between goods. For example, when the goods are perfect substitutes, he found that the indifference curves would become straight lines parallel to each other.

**2. Capital****:**

In his book “The Nature of Capital and Income” Irving Fisher discussed about capital. He maintained that capital and income could not be treated as abstract and unrealistic concepts.They were derived from the realities of economic life. Capital was a fund while income from it was a flow.

Accordingly the current value of capital was nothing but the discounted value of future income from the capital. This way of looking of the current value of capital has been proved to be useful in both theoretical and empirical studies. Keynesian marginal efficiency of capital is based upon this approach.

**3. Interest****:**

Fisher thought that the main problem in Economics was the determination of rate of interest. For his analysis of interest, Fisher considered three factors namely, impatience or preference for present goods, productivity and uncertainty and risk. Of these, impatience and productivity determined the rate of interest. Here it should be noted that Fisher’s concept of productivity is similar to Keynes’ marginal efficiency of capital.

ADVERTISEMENTS:

Fisher emphasised that interest would not arise, if an individual was indifferent towards the present. Interest arose on account of time preference. Thus Fisher integrated the time preference and productivity theories of interest. Therefore his theory of interest was a non-monetary theory. He did not distinguish between real and monetary rate of interest.

**4. Quantity Theory of Money****:**

**Transactions approach****:**

Fisher stated the theory as, “Quantity Theory asserts that (provided the velocity of circulation and the volume of trade are unchanged) if we increase the number of dollars whether by renaming coins or by debasing coins or by increasing coinage, price will be increased in the same proportion”.

In order to explain the direct and proportionate relation between quantity of money and price level, Fisher gave an equation of exchange. The original equation of exchange was

PT = MV (or) P = MV/T

In which ‘P’ stands for the price level, ‘M’ quantity of money and T for transactions.

But the later critics criticised this original equation, for not including credit money. So Fisher presented a modified equation of exchange by including credit money.

PT = MV + M^{1} V^{1} (or) P = MV + M^{1}V^{1}/T

In which M and V stand for metallic money and its velocity of circulation. M^{1} and V^{1} for credit money and its velocity of circulation.

ADVERTISEMENTS:

Fisher based his quantity theory of money on certain assumptions. He assumed that the velocity of circulation of money and volume of trade to remain unchanged.

**Further he mentioned certain factors that determined the velocity of circulation of money. They were:**

(1) System of payment

(2) Development of credit and finance

ADVERTISEMENTS:

(3) The speed with which money is transported

(4) Community’s consumption and saving habits

(5) Expectation regarding future incomes and prices of goods and services.

Fisher pointed out that in economically backward countries, the velocity of circulation of money was low. So in order to increase the velocity, Fisher suggested that the people should not hoard their savings but invest them in productive channels.

ADVERTISEMENTS:

**Fisher’s quantity theory of money has been criticised. Some of the criticisms are: **

(1) It did not explain the changes in the value of money.

(2) The price level depends on certain non-monetary factors also.

(3) The theory did not treat the problem dynamically.

ADVERTISEMENTS:

(4) The equation did not differentiate between cash deposits and saving deposits.

(5) The theory failed to explain the price movements in war times.

**Compensated standard****:**

In order to compensate the changes in the purchasing power of money, Fisher suggested a compensated dollar. Compensated dollar means, the metallic content of the dollar should change in proportion to the changes in the price level. For example, if the price level rose by 10 percent, it meant that the purchasing power of a dollar had fallen by 10 percent. So to compensate this, the metallic content of the dollar should be increased by the same percentage.

**Currency principle****:**

In his book “100 Percent Money”, Fisher suggested this currency principle for the banks. He said the banks could follow this principle, in accordance with, the banks were required to maintain 100 percent resources against deposits. They could not expand the currency unless fully backed by cash. But there were certain practical difficulties in the implementation of the plan.

**Theory of business cycles****:**

According to Fisher, the main cause for business fluctuations was the changes in credit. He said business depressions were merely the “dances of the dollar”. Fisher suggested that in order to lift the economy from depression, prompt action in the form of reflation should be taken by the central bank.

**Critical Appraisal of Irving Fisher****:**

Irving Fisher was a pioneer in the field of econometrics. He opposed laissez faire and pleaded for an equitable distribution of income. Schumpeter says his Theory of Interest is a peak achievement of the literature of interest. Unfortunately he had large number of pupils but no disciples. He did not found a school. So there have been many Ricardians, Marshallians, and Keynesians but no Fisherians.