The Works of Irving Fisher

Irving Fisher (1867–1947): Career Highlights and Formative Influences*, An Address on the Irving Fisher Foundation, by Irving Fisher, September 11, 1946, Mathematical Investigations in the Theory of value and Prices: Prelims, Utility of Each Commodity Assumed to Be Dependent Only on the Quantity of That Commodity: Utility as a Quantity., Mechanism., One Consumer (or Producer)—Many Commodities., M Commodities—N Consumers (or Producers)., Production and Consumption Combined., The Component Processes of Production., Utility of one Commodity a Function of the Quantities of all Commodities.: Two Commodities., Three or More Commodities., Mechanical Analogies., Utility as a Quantity., Appendix I, Appendix II, Appendix III, Appendix IV, Reviews of “Mathematical Investigations in the Theory of Value and Prices.”, Fisher’s Annotations to Mathematical Investigations in the Theory of Value and Prices, 1946, The Mechanics of Bimetallism, Appreciation and Interest: Prelims, Theory.: Introduction., One Year Contracts.1, More Than One Year., “Present Value”., Varying Rates of Interest and Appreciation., Zero and Negative Interest., Facts.: Introduction., Gold and Paper., Gold and Silver., Money and Commodities., Applications.: The Bimetallic Controversy., The Theory of Interest., What is Capital?, Senses of “Capital.”, The Rôle of Capital in Economic Theory, Precedents for Defining Capital.

Schumpeter regarded The Nature of Capital and Income as one of the three of Fisher’s contributions to general theory generally recognized, at the time Schumpeter was writing, as “of first-class importance and originality.” The other two were Fisher’s Mathematical Investigations (1892) and his statistical method for measuring the marginal utility of income (1927). Actually Schumpeter cites, as if still another, Fisher’s theory of interest – presented in The Rate of Interest (1907) and The Theory of Interest (1930) – but it is not quite clear whether he gives it full rank.

The Rate of Interest, published in 1907, was a logical sequel to The Nature of Capital and Income (which had appeared in 1906). Indeed Fisher regarded them as companion volumes and had sought – unsuccessfully – to persuade his publisher to make an advance announcement of the projected second volume at the time the first was being promoted. The first of the two books had demonstrated the crucial role of the interest rate in determining capital values through the discounting of the prospective income stream. What remained to be shown was how the interest rate itself was determined. Fisher assigned himself that task in the 1907 work.

In his review of this book in 1911, John Maynard Keynes drew attention to the “remarkable contrast” between the state of debate over monetary issues in the United States and in Britain. The fact that monetary affairs had been at the heart of American political controversy had sparked the production of a considerable polemical literature by economists on that side of the Atlantic. In England, by contrast, academic economists had been spared such Sturm und Drang. In consequence, they had largely been silent in print on these matters – a phenomenon which had “greatly hindered the progress of the science.”

By the end of the first decade of the twentieth century, the discipline of economics had established itself in the curricular offerings of most American colleges and universities. Differences in style and approach among those who professed it were to persist. At the same time, the polemical turbulence of an earlier era had subsided. In the 1880s and 1890s, the battlelines had been sharply drawn between proponents of two rival “schools.” The “new schoolers” - most of whom had absorbed abroad the teachings of German historicism - had returned home fired with enthusiasm for governmental intervention to promote economic and social uplift. Part of their program amounted as well to a denunciation of deductive reasoning in economic discourse. “Old schoolers,” on the other hand, remained ardent champions of laissez-faire and defended the doctrines received from the British analytic tradition. The intense controversies of the Methodenstreit of the late nineteenth century left plenty of scar tissue behind them. Nonetheless, most members of the American Economic Association had concluded that internecine warfare was counter-productive. In 1911, Columbia’s Edwin R.A. Seligman articulated a view then widely shared:

The outbreak of the Great War effectively terminated the first phase of Fisher’s crusade to put price level stabilization high on the agenda of international discussion. After August 1914, it was obvious that little purpose would be served by continuing to campaign for an International Commission to inquire into the high cost of living. The concerns which had inspired him to devise remedies for fluctuating price levels certainly had not vanished. On the contrary, the central problems survived in forms that made it all the more urgent that they be given thoughtful consideration. America’s entry into the war in 1917 added force to inflationary pressures on the domestic scene. In addition, the status of the United States as a belligerent meant that the nation had still weightier obligations to shape a post-war international economic order that would promote peace and prosperity.

Measuring movements in the general level of prices was crucial for Irving Fisher’s monetary economics. His distinction between real and nominal interest rates depended on changes in the general price level. His statement of the quantity theory of money, holding that, other things being equal, a change in the quantity of money leads in the long run to a change in the price level of the same proportion, also depends on the concept and measurement of an index of the average level of prices. His compensated dollar proposal called for stabilization of an index of commodity prices. Fisher drew on his great energy and determination in his effort to decide upon and calculate an ideal index number for prices, along with the corresponding index for quantities. Although Fisher had predecessors, whom he generously acknowledged, Arthur Vogt rightly states that one may call Fisher’s The Purchasing Power of Money the old testament and The Making of Index Numbers the new testament of statistical index theory.

As was evident in his testimony in support of the Goldsborough Bill in 1922, the recession of 1920–21 in the American economy had left a mark on the way Fisher presented the case for stabilizing the dollar. (See the editorial commentary in Volume VI.) Thereafter he assigned a heavy weight to the argument that stability of the general price level would tend to minimize economic fluctuations. But the post-World War I recession also brought to the fore another way of thinking about the route to stabilization: i.e., a program of counter-cyclical spending on public works. In American official circles in the 1920s, this alternative to Fisher’s monetary approach to policy had the inside track.

The Theory of Interest, as Fisher observed in the Preface to the work, should be read more as a clarification than as a modification to the doctrines he had set out in The Rate of Interest (1907) and in the exchanges it had provoked in the years immediately thereafter. Even so, this book was more than a restatement of views he had advanced earlier. Both in substance and in style, The Theory of Interest moved the discussion of this topic to higher ground.

For Fisher, the years 1929–1933 were extraordinarily trying. He was totally unprepared for the onset of the Great Depression. The lesson of the theories he had worked out in the 1920s seemed to be that significant fluctuations in economic activity were preceded by changes in the price level. But that model could not explain what had happened in the American economy following the stock market crash in the autumn of 1929. For the preceding half decade or so, the general price level had been remarkably stable – a condition that appeared to have augured well for continued economic stability. Fisher – along with a substantial number of his professional colleagues – confronted a formidable intellectual challenge in meshing his theorizing with observable realities.

In the autumn of 1933, Fisher had applauded Franklin D. Roosevelt’s attempts to “reflate” the economy by raising the price of gold. He was dismayed, however, when the President called a halt to the gold purchase program at the end of January 1934. In Fisher’s judgment, the necessary task of “reflation” had been only partially done. (See the documentation of Fisher-Roosevelt correspondence for this period collected in Volume 14.) Additional monetary interventions were thus in order.

For the bulk of Fisher’s career, the aspects of his economic thinking that were linked most directly with issues of public policy were monetary matters. Problems in public finance were decidedly secondary. From 1936 onwards, however, he took forceful positions on the way tax policy should be structured. In his ideal world, savings (both personal and corporate) would be immune from taxation and there would be no taxes on capital gains. The revenue needs of the state would instead be met primarily by a progressively-scaled tax on personal consumption and by heavy levies on inheritances.

The materials gathered in this volume speak to dimensions of Fisher’s interests and activities that extend beyond his work as a professional economist. Nonetheless, Fisher the economic theorist and Fisher the crusading activist are inseparable. He set out his own assessment of the inter-connectedness in a letter to his wife in mid-1924, written while he was in the midst of a transcontinental speaking tour to mobilize public support for American membership in the League of Nations. In his words:

The materials collected in this volume have been selected to illuminate Fisher’s perspectives on the challenges facing economists and economicpolicy makers between 1930 and his death in April 1947. These were years in which there were challenges aplenty. Economic policy-makers had to come to grips with the Great Depression, with economic mobilization for war, and with the design of a post-World War II economic order. Meanwhile members of the economics profession were being obliged to define their position vis-a-vis a doctrinal revolution associated with the name of Britain’s John Maynard Keynes.