Neoclassical Economics: Irving Fisher

Summary

Neoclassical economics is really the birth of mathematics as an inescapable tool for constructing theories that are internally coherent (that is, explained in and of themselves without requiring casuistic examples), escaping the slightly lackadaisical approach of many classical economists like the great Ricardo. This allowed Economics to develop at a much faster pace, and provided the basis for how Economics is studied and investigated today.

Marginalism:

Neoclassical economists:

Irving Fisher was an American economist (1867-1947), professor of Political Economy at Yale University, known for his contributions to quantitative economics (works such as “The Nature of Capital and Income”, 1906, and “The Purchasing Power of Money”, 1911) and especially the development of index numbers. He also addressed interest rates, in his opinion governed by two interacting forces: the impatience of individuals in terms of exchanging future income for current income, and the principle of yield paid by doing so. In his “Appreciation and interest”, 1896, Fisher showed the relation between the nominal interest rate (i), the real interest rate (r) and inflation (Π) using an equation, known nowadays as the Fisher equation:

i ≈ r + Π

Although this relation derived from earlier works by Jacob de Haas, Irving Fisher’s formula is an easier way to represent this relation.

In the early autumn of 1929, shortly before the famous Black Thursday, Irving Fisher said, “stock prices have reached what looks like a permanently high plateau.” After the stock Crash, he lost his credibility, being this the reason why his work was not taken seriously until decades later.

Predecessor of monetarism, and following the works of bullionists, David Hume, the School of Salamanca and John Stuart Mill, he showed that prices vary depending on the volume of money in circulation, being this variation as shown by the equation of exchange, which he first depicted in his book “The Purchasing Power of Money“.

To better understand how all this came about, it is often clearer to understand the three main schools that were around at the time. Each was often working in synchronicity with the rest, and when there were clashes, these were often the basis for further research. They are a good way to see how the thinking, social and political, at the time were instrumental to the development of much of what we take for granted today, and to see the common denominator behind many of the great economists at the time.

Neoclassical Economics: Vilfredo Pareto