Celebrating Irving Fisher: the legacy of a great economist

American Journal of Economics and Sociology, The, Jan, 2005 by Robert W. Dimand, John Geanakoplos

Since the market value of the assets acquired with savings is the discounted present value of the expected receipts to be received from owning the assets, Fisher held that it would be double-counting to include as income both the savings and the subsequent stream of earnings from the assets. As John Shoven and John Whalley discuss in this volume, Fisher redefined income to exclude net savings, so as to avoid double taxation and a tax-induced bias against saving. Instead of the income tax, Fisher proposed an expenditure tax. In recent years, Fisher's concern about a tax bias against capital accumulation has again come to the fore in public finance.

Fisher emphasized that human capital, the discounted present value of the stream of income from human skills and abilities, far exceeds the value of physical capital. He cited an estimate stating that human capital in the United States was worth five times as much as physical capital. Accordingly, he advocated investment in improving health, co-authored a best seller on How to Live (1915), and devoted his two presidential addresses to the American Association for Labor Legislation to proposals for a national department of health and for health insurance. Fisher's guide to a healthy life sold 400,000 copies in 21 editions in his lifetime, far more than any of his other books, while insurance companies distributed 12 to 15 million copies of an abridgement. Papers by William Nordhaus and Victor Fuchs in this volume, with comments by Robert Dimand, the late Alvan Feinstein, T. N. Srinivasan, and Richard Zeckhauser, follow Fisher in their concern with the economic value of the health of nations.

Fisher's American Economic Association monograph Appreciation and Interest ([1896] 1997, Vol. 1) was the first substantial study of expected inflation as the difference between nominal interest and real interest, a distinction whose recognition Fisher credited to earlier writers, especially Alfred Marshall. This relationship has become known as the Fisher equation. Considering rates of interest in different monetary standards, Fisher (1896) pioneered the uncovered interest parity theorem that nominal interest rates in two countries will differ by the expected rate of change of the exchange rate between the currencies of the countries. Attributing differences among money rates of interest for different terms to expectations about the future course of prices, Fisher offered an expectations theory of the term structure. He is often misremembered as asserting that real interest is independent of inflation and monetary shocks. This was true only for comparison of equilibria; his theory of economic fluctuations stressed the effect of monetary shocks on real interest during transition periods (see Dimand 1999a, 1999b). In The Theory of Interest (1930), Fisher used a distributed lag of past price level changes to represent expected inflation in correlations between nominal interest and expected inflation, an anticipation of the adaptive expectations hypothesis. Given Fisher's role as a pioneer of distributed lags and correlation analysis and as the founding president of the Econometric Society, it is highly appropriate that Peter C. B. Phillips applies new methods of data description for nonstationary time series to an "Econometric Analysis of Fisher's Equation" in this volume.