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Transcript
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 -1- 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. -2- 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 -3- Irving Fisher Future Goods (Year 1) PPC Ko Co - 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 -4-