The Fruits of Civilization (27-16) Irving Fisher

Irving Fisher

Irving Fisher is the greatest economist the United States has ever produced. ~ Milton Friedman

American mathematical economist Irving Fisher (1867–1947) inaugurated the macroeconomic school of thought of monetarism with his “quantity theory of money,” which postulated that the aggregate price level of an economy is directly correlated to the money supply. According to this notion, for instance, putting more money in circulation leads to a proportional rise in the price of goods.

Monetarism is a macroeconomic school of thought that emphasizes the importance of the finance in regulating the vitality of the economy.

Fisher thought that the value of goods had a time as well as quantity dimension. He considered the market interest rate as a measure of that time value, in the relative price of goods via deferred consumption: goods available at a future date for not being consumed at present.

Supply-and-demand determination of the interest rate means that its level is determined by interaction between (1) people’s impatience to consume now rather than accumulate more capital goods for future consumption (perhaps in old-age retirement or for the proverbial rainy day); and (2) investment opportunities that exist to procure higher or lower net productivities from such capital accumulated. ~ Irving Fisher

Economists consider the market interest rate as having 2 functions: 1) inducement to savings or consumption, depending upon its level, and 2) rationing out society’s scarce capital stock to the most productive activities (there has always been the wildly optimistic faith that the market systems’ “invisible hand” was ever efficient).

In actuality, people borrow money because they want something they cannot afford. An interest rate merely sets the calculated threshold of desperation that must be felt to obtain the principal amount. Economists’ theoretical noodling about interest rates is hogwash.

Fisher viewed investors as professionally rational. That view was put to the test in his time, at the onset of the most melodramatic episode in post-industrial economic history.

Fisher’s publicly announced a few days before the stock market crash of 1929 that “stock prices have reached what looks like a permanently high plateau.” Following the initial lurch downward, Fisher figured that the market was “only shaking out of the lunatic fringe,” and that stock prices had still not caught up with their real value and should go much higher.

For months after the crash, Fisher continued to reassure that recovery was just around the corner. The walk around Fisher’s corner turned out to be a long one: the stock market did not recover from its late 1920s highs for 30 years.