Celebrating Irving Fisher: the legacy of a great economist

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

A group of three papers and three comments considers Fisherian themes in monetary economics and macroeconomics. Robert E. Hall examines Chile's experiment with the Unidad de Fomento as an implementation of Fisher's compensated-dollar plan, under which the resource content of the unit of account is varied to stabilize the cost of a bundle of commodities. James Tobin argues that the present multiplicity of available stores of values reduces the importance of stabilizing the real value of currency, and concludes: "At the end of the century, monetary and economic stability does not seem to be as daunting a challenge as it appeared to Fisher. Fisher himself deserves considerable credit for this happy result." Martin Shubik raises several questions that need to be answered before Hall's proposed indexed unit of account can be a practical policy rather than a theoretical possibility. He draws attention to ongoing work on stochastic strategic game process models as a source of insights into the microeconomics of money, financial institutions, efficiency, and inflation.

Peter C. B. Phillips's "Econometric Analysis of Fisher's Equation" applies new econometric techniques to "Fisher's equation," which equates the nominal interest rate to the sum of real interest and expected inflation. Phillips's new methods of data description for nonstationary time series provide a nonparametric mechanism for modeling the spatial densities of a time series that displays random wandering characteristics (like interest rates and inflation) and an estimation procedure called modified log periodogram regression to obtain semiparametric estimates of long range dependence in U.S. real interest rates. John Rust summarizes Phillips's key theoretical results "for the benefit of readers who may not be familiar with advanced stochastic processes," identifies empirical puzzles that remain unresolved, and doubts whether some of the empirical questions are well posed. Fisher was a pioneer in the use of distributed lags and correlation analysis and was a crucial figure in the creation of both the Econometric Society and the Cowles Commission (now the Cowles Foundation), so the application of novel econometric techniques to the Fisher equation is particularly apt as part of a celebration of Fisher's legacy.

Robert Dimand suggests that the debt-deflation process of Fisher (1933), which was also briefly mentioned independently by Keynes, provides a way of introducing a corridor of stability into macroeconomic models, so that the models would be self-adjusting for small shocks but not for shocks large enough to push the economy beyond the threshold of stability. Such models could explain why the classical adjustment mechanism would usually work but occasionally break down, as in the Great Depression.

Two papers by James Tobin discuss Fisher's innovative Elementary Principles of Economics (1912) and Nature of Capital and Income (1906). Tobin describes Fisher's elementary textbook, which has been almost entirely forgotten, as a brilliant attempt to make advanced economic theory accessible to students in introductory classes. Tobin's essay on The Nature of Capital and Income was first published in German, in a collection of essays accompanying a facsimile reprint of Fisher's book, and was reprinted as an introduction to the reprint in The Works of Irving Fisher. Tobin emphasizes the simplicity and comprehensiveness of Fisher's concept of capital and praises Fisher's book for its careful attention to the distinction between stocks and flows and to the dimensionality of concepts used in economic discourses. However, Tobin finds that Fisher's concept of income (equated to current consumption) remains controversial and suggests that some notion of sustainable consumption (such as the hypothetical intact-capital rate of consumption that Fisher termed "standard income") would be preferable.