Irving Fisher: Underappreciated economist

by on November 30, 2009 at 7:39 am in Current Affairs, Economics, History | Permalink

Tyler points to Malthus as a much underappreciated economist. John Cassidy points to Pigou.  For my money, Irving Fisher dominates.  Other people (e.g. London Banker and Yves Smith)
have also extolled Irving Fisher, but I would still rank
Fisher as highly underappreciated relative to insight and clarity of thought.

Here from his classic, The Debt-Deflation Theory of Great Depressions, are some choice insights. 

Then we may deduce the following chain of consequences in nine links: (1) Debt liquidation leads to distress selling and to (2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes (3) A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be (4) A still greater fall in the net worths of business, precipitating bankruptcies and (5) A like fall in profits, which in a "capitalistic," that is, a private-profit society, leads the concerns which are running at a loss to make (6) A reduction in output, in trade and in employment of labor. These losses, bankruptcies and unemployment, lead to (7) Hoarding and slowing down still more the velocity of circulation.

The above eight changes cause (9) Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.

Evidently debt and deflation go far toward explaining a great mass of phenomena in a very simple logical way.

With perhaps the qualification that even real rates of interest may fall is this not a brilliant summary of current events?  And on the solution to the crisis:

On the other hand, if the foregoing analysis is correct, it is always economically possible to stop or prevent such a depression simply by reflating the price level up to the average level at which outstanding debts were contracted by existing debtors and assumed by existing creditors, and then maintaining that level unchanged.

With a few changes to growth rates rather than levels is this not fully modern?  And the following, with its hint of the importance of expectations, strikes a very Sumnerian tone (or rather, of course, Sumner's analysis strikes a very Fisherian tone).

…The fact that immediate reversal of deflation is easily achieved by the use, or even the prospect of use, of appropriate instrumentalities has just been demonstrated by President Roosevelt. Note Charts VII and VIII.

And behavioral economics was nothing new to Irving Fisher:

The public psychology of going into debt for gain passes through several more or less distinct phases: (a) the lure of big prospective dividends or gains in income in the remote future; (b) the hope of selling at a profit, and realising a capital gain in the immediate future; (c) the vogue of reckless promotions, taking advantage of the habituation of the public to great expectations; (d) the development of downright fraud, imposing on a public which had grown credulous and gullible.

When it is too late the dupes discover scandals like the Hatry, Krueger, and Insull scandals. At least one book has been written to prove that crises are due to frauds of clever promoters. But probably these frauds could never have become so great without the original starters of real opportunities to invest lucratively. There is probably always a very real basis for the "new era" psychology before it runs away with its victims.

1 Bill November 30, 2009 at 8:28 am

As an economist, he was not much of a market timer.

His famous quote just before the market crash of 1929: “Stock prices have reached what looks like a permanently high plateau.”


2 Andrew November 30, 2009 at 8:50 am

But what if some people are counting on real values for purchasing power to pay off debts? What about industrial users of commodities that can only pay off their debts based on their costs?

The externality benefit to speculation is to get the prices right so things can change hands. So, at best, the helicopter gunships mow down those betting on deflation. The helicopter is a ham-handed and chaotic way to affect debt restructuring through the scramble for cash.

Bill, I know it’s the old saw, and I have no idea what was in the man’s mind, but if you told a speculator that values had reached a permanent plateau, he would want to dump them. So, that quote is not unlike something Warren Buffett might say to signal a top.

3 Ed November 30, 2009 at 10:12 am

Isn’t Fisher really talking about how to prevent panics, not how to prevent depressions?

4 Rob Ross November 30, 2009 at 10:21 am

Malthuse is popular because he explains poverty in terms of limited resources, not in terms of systemic unfairness. I’d say Henry George is a largely ignored economist who, nonetheless, had an accurate and astute read on our economic behavior. His explanation of the role of land values in economic crises continues to be salient today.

5 Diversity November 30, 2009 at 10:52 am

“Fisherian tone”? I think not. Sumner has interesting tones; Fisher strikes clear notes. Try “Fisheriate note”.

6 JH November 30, 2009 at 1:11 pm


While it is amusing to poke fun at Fisher for his ill-timed recommendation, but the evidence is not so clear that he was wrong ex ante:

7 CK November 30, 2009 at 3:16 pm

Step the first) Is not necessarily true. It is fictionally true.
Step the second) Is Inverted. Debts require regular payments, the money that was going to regular payments is now free to go elsewhere. Some of it will go to deposits, some to investments and some to personal safes and matresses, and some will light the debt instruments and enjoy the short fire.
Step the third and fourth) foolishness ( only if more than a market filling amount of such stuff appears will prices fall) After resources change hands from the inept to the ept, costs fall and prices fall and efficientcy/hr increases and wages increase) and falsity ( yes some inept business disappear, but the resources do not. The resources flow to those who can make a higher profit. Clearing out the dead underbrush lets the efficient and smarter make money where the previous owners had pissed money away.
Step the fifth) When one is not paying out to pay off old debts, one might re-invest those ( no longer extant monthly outgoes ) in one’s business if it is profitable, pay out to ones stockholders, put excess cash to work in research to gain an advantage over one’s Fischerian competitors ( or one’s Keynsian … but why imagine foolishness squared?)
Steps the sixth and seventh ) Illogical Dr Fischer, nay stupid. These steps do not even follow logically from the garbage that has flowed before them.
Step the eighth is omitted here also. If one cannot count to 8, one is probably not a valuable source of economic wisdom, one is probably not even a trustworthy accountant, one might be good enough for Federal Reserve emouluments.
Step the Ninth) May I paraphrase? The cost of money will fluctuate no matter what one does or says or thinks or wishes or hopes or sprays unctuous oil upon.

Now as to Malthus, he was not underappreciated but like so many current anti-fed, antiwar opinionators, he was correct before it was fashionable.

8 Barkley Rosser November 30, 2009 at 4:11 pm

I find the basic premise of this post to be might peculiar. Irving Fisher “underappreciated”?
You have to be kidding. He is one of the 18 (dead) economists to appear in the recently released
AEA calendar of famous economists. Being in the top 18 of dead economists does not suggest that
one has been ignored or underappreciated, quite the contrary.

Now, it may be that his debt-deflation theory has been underappreciated, whatever one thinks of it
(and some commenters here do not like it). But it got far more citations and discussion in the
influential papers by Bernanke and Gertler and others on financial fragility than anything by Hyman
Minsky, whom many would argue was more insightful and deep than Fisher, who was a johnny-come-lately
to trying to explain the GD after his ludicrous stock market forecast in 1929.

Among things that Fisher is credited with are 1) first actually writing down the MV = PT equation,
although it was implicit in many earlier discussions, 2) being the first to use indifference curves
to generate a theory of real interest rate determination based on the interaction of intertemporal
preferences and intertemporal productivity, which is the standard workhorse of neoclassical models
down to and including the wretched DSGE models, 3) the first to distinguish real from nominal interest
rates, and quite a bit more. Some have also labeled him the first serious American mathematical
economist, which is probably correct.

If anything, Fisher has been given too much credit for too many things. Thus, in 1907 he came
out with a famous and widely cited theory of the optimal rotation period for a forest. It amounted
to “cut the forest when its growth rate equals the real rate of interest.” Well, not only was he
beaten to the punch on that one, but his predecessor did a better and more complete job of solving
the problem than he did. That would be Martin Faustmann, who wrote in German and provided his
solution in 1849. Why is it better? It takes account of replanting and solves the more general
infinite horizon problem involved, whereas the implication of Fisher’s solution is that one is going
to do nothing with the forest after one cuts it down, abandon it, a “cut and run” policy.

9 Beltway Libertarian November 30, 2009 at 4:14 pm

Our independent federal reserve and brightest economic thinkers will have us out of this pickle in no time…they have studied the great depression more than anyone!

10 Bob Murphy November 30, 2009 at 9:26 pm

BTW since Alex is getting piled on, I should clarify that I think modern economists probably don’t understand how many contributions Fisher made to modern economics. (I had no idea myself until I read Mark Thornton’s article on it.) However I’m pretty sure Milton Friedman somewhere said Fisher was his favorite economist (or something like that), and it was in a pop book where plenty of people would see it. So it’s not as if Fisher gets no loving.

11 Ryan Vann December 1, 2009 at 9:57 am

Even as an undergrad, I was taught a bit about Fisher. In my experience for undergrad classes to actually mention Economists, who weren’t Keynes, Marx, Friedman, Smith, Malthus, or Lucas was pretty rare. Obviously someone thought Fisher was pretty important.

Anyway, I think Silvio Gisell is one of the most underappreciated economists ever. Fisher himself actually continued a lot of the theory Gisell had been working on, as did Keynes, and others.

12 Alex Tabarrok December 1, 2009 at 7:07 pm

Of course, I mean–as did Tyler and Cassidy– as underappreciated in respect of the current crisis. Compare the ink spilled on Keynes in the last year versus Fisher, for example.

13 Kalman Schulgasser December 13, 2009 at 3:15 am

I am not an economist; I am just a simple engineer. But I do know that to say that Irving Fisher was “underappreciated” is silly. Part of his economic theory was eugenics. He was a strong proponant of the latter – took a leading roll in various organizations. He was a leading proponent of the harshest sterilization laws. He saw “health” issues (“physical”, “mental” and “moral” traits)as intimately related to economics. He even believed in the “focal sepsis” crap to the extent that he had his daughter Margaret’s gut chopped up as a cure for her supposed schizophrenia. She died. I do not “underappreciate” Fisher; I just don’t appreciate him at all. All you economists can continue to to be selective and talk about “underappreciation”.

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