Download Irving Fisher (1867-1947)

Irving Fisher
Irving Fisher (1867-1947)
Background:
- Yale student (mathematics) and academic
- Schumpeter thought him the greatest of American economists
- contributed studies of index numbers and distributed lags to statistical theory
- his important economic contributions include the quantity equation of money,
indifference curve analysis, and theory of interest
1892 - published foundations of indifference curve analysis
1907 - published The Rate of Interest
Method:
- applied Walrasian technique to intertemporal price determination of goods
Utility Analysis
- believed that utility was cardinally measurable
-> developed a technique to measure utility as a function of one variable
EXPLAIN
- recognized that utility depends on the quantities of all commodities (even other
people’s holdings of commodities) and not simply on the quantity of the
commodity in questions
-> application of Walrasian general equilibrium to utility, not just price
[Walras, like other predecessors, had MUa = f(Qa) but Pa = f(Qa, Pb, Pc,….)
– Fisher showed that MUa = f(Qa, Qb, ….)
-> made cardinal measurement of marginal utility difficult if not impossible.
-> led to development of indifference curves
- Edgeworth had used utility surfaces in a 3 dimensional demonstration (MU, Qx,
Qy) of utility derived from two goods (X, Y) but this still implied cardinal
measurement
- Fisher mapped the surface onto 2 dimensions (Qx, Qy) which eliminated the
assumption of measurement (cardinal MU)
=> indifference curves
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Irving Fisher
Real versus Nominal Interest Rates
- equation of exchange MV + M’V’ = PT
[Tautology]
[transactions demand for money. An expression of the classical view that
money is neutral or that there is a dichotomy between money and real sector]
M = currency
V = velocity of currency
M’ = demand deposits V’ = velocity of demand deposits
T = transactions
P = prices
- assumed velocities and transactions were independent of M, M’, and P
[did not assume, as is commonly believed, that velocities and transactions were
fixed]
-> change in M -> proportional change in money
-> theory of money, i.e., a quantity theory
- led to the distinction that the real interest rate was independent of prices
nominal interest rate = real interest rate + expected rate of inflation
-> opened the possibility that the real interest rate is negative
Capital and Interest
- credited Bohm-Bawerk’s work
- refined B-B’s approach of time preference due to subjective evaluation (discount of
future) and greater product of future relative to the present
- originally called his theory an “Impatience Theory” but to avoid the appearance of
downplaying the technical component, he later called it “Theory of Interest as
determined by Impatience to spend Income and opportunity to invest it”
- believed himself the first to distinguish between the cost of a capital good and its
present value as a stream of expected returns
- consumption is the flow of commodities desired by an individual and capital is the
stock of commodities which determine this flow
- individuals can use an initial stock of capital goods and labour to produce a set of
consumption goods in year 1, year 2, etc.
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Irving Fisher
-> production possibility frontier for present and future goods
Future Goods (Year 1)
PPC
Present Goods (Year 0)
-
individuals rank present and future goods according to preference
-> intertemporal indifference curves
Future Goods (Year 1)
Indifference Curve
Present Goods (Year 0)
-
the slope of the tangency of these two curves = 1 + r
-> interest rate can be negative if the slope < 1
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Irving Fisher
Future Goods (Year 1)
PPC
Ko
Co
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Present Goods (Year 0)
Fisher improved on B-B by
– eliminating dependence on the assumption that capital productivity
necessarily increases with time
– eliminating assumption that consumers must value present over future goods
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