ACKNOWLEDGEMENT

We grab this opportunity to express my high gratitude towards my college . This project has not only widened my horizon as far as academics are concerned but also helped me to enlarge my knowledge bank. The short span of researching has helped me to gain knowledge about the responsibilities of human beings towards researching in the economics sector with the help of the theories of various economists. .

We express my special thanks to Mrs. Karve, for giving us the opportunity to work on this project.

Irving Fisher

Early adulthood

Fisher's father was a teacher and Congregational minister, who raised his son to believe he must be a useful member of society. The young Irving had mathematical ability and a flair for invention. A week after he was admitted to Yale University, his father died at age 53. Irving carried on, however, supporting his mother, brother, and himself, mainly by tutoring. He graduated from Yale with a B.A degree in 1888, where he was a member of Skull & Bones.

Fisher's best subject was mathematics, but economics better matched his social concerns. He went on to write a doctoral thesis combining both subjects, on mathematical economics. Irving was granted the first Yale Ph.D. in economics, in 1891. His advisors were the physicist Willard Gibbs and the economist William Graham Sumner. Fisher did not realise at the outset that there was already a substantial European literature on mathematical economics. Nevertheless, his thesis made a contribution European masters such as Francis Edgeworth recognised as first rate.

He constructed a wonderful machine of pumps and levers to complement and illustrate his thesis. While his books and articles on economic topics exhibited unusual (for the time) mathematical sophistication, Fisher always wished to bring his analysis to life and to present his theories in a very lucid manner.

This research into basic theory did not touch the great social issues of the day. Monetary economics did and this became the main focus of Fisher’s work. In the 1890s the United States was divided over the question of the monetary standard. Should the dollar float, be fixed in terms of gold or silver, or some combination of the two? To opt for one system was to choose between West and East, farmer and financier, debtor and creditor, …. Fisher’s Appreciation and interest was an abstract analysis of the behaviour of interest rates when the price level is changing. It emphasised the distinction between real and monetary rates of interest which is fundamental to the modern analysis of inflation. However Fisher believed that investors and savers—people in general—were afflicted in varying degrees by “money illusion”; they could not see past the money to the goods the money could buy. In an ideal world, changes in the price level would have no effect on production or employment. In the actual world with money illusion, inflation (and deflation) did serious harm.

[edit] Later life

Fisher was a prolific writer, producing journalism, as well as technical books and articles, addressing the problems of the First World War, the prosperous 1920s and the depressed 1930s.

[edit] Economic theories

[edit] Money and the price level

Fisher's theory of the price level was the following variant of the quantity theory of money. Let M=stock of money, P=price level, T=amount of transactions carried out using money, and V= the velocity of circulation of money. Fisher then proposed that these variables are interrelated by the Equation of exchange:

MV=PT.

Later economists replaced the amorphous T with y or "Q", real output, nearly always measured by real GDP.

Fisher was also the first economist to distinguish clearly between real and nominal interest rates:

where r is the real interest rate, i is the nominal interest rate, and inflation is a measure of the increase in the price level. When inflation is sufficiently low, the real interest rate can be

approximated as the nominal interest rate minus the expected inflation rate. The resulting equation bears his name.

For more than forty years, Fisher elaborated his vision of the damaging “dance of the dollar” and devised schemes to “stabilise” money, i.e. to stabilise the price level. He was one of the first to subject macroeconomic data, including the money stock, interest rates, and the price level, to statistical analysis. In the 1920s, he introduced the technique later called distributed lags. In 1973, the Journal of Political Economy reprinted his 1926 paper on the statistical relation between unemployment and inflation, retitling it as "I discovered the Phillips curve". Index numbers played an important role in his monetary theory, and his book The Making of Index Numbers has remained influential down to the present day.

[edit] The theory of interest and capital

While most of Fisher's energy went into "causes" and business ventures, and the better part of his scientific effort was devoted to monetary economics, he is best remembered today for his theory of interest and capital, studies of an ideal world from which the real world deviated at its peril. His most enduring intellectual work has been his theory of capital, investment, and interest rates, first exposited in his The Nature of Capital and Income (1906) and elaborated on in The Rate of Interest (1907). His 1930 treatise, The Theory of Interest, summed up a lifetime's work on capital, capital budgeting, credit markets, and the determinants of interest rates, including the rate of inflation.

Fisher saw that subjective economic value is not only a function of the amount of goods and services owned or exchanged but also of the moment in time when they are purchased. A good available now has a different value than the same good available at a later date; value has a time as well as a quantity dimension. The relative price of goods available at a future date, in terms of goods sacrificed now, is measured by the interest rate. Fisher made free use of the standard diagrams used to teach undergraduate economics, but labelled the axes "consumption now" and "consumption next period" instead of, e.g., "apples" and "oranges." The resulting theory, one of considerable power and insight, was exposited in considerable detail in The Theory of Interest; for a concise exposition, click here.

This theory, since generalized to the case of K goods and N periods (including the case of infinitely many periods) using the notion of a vector space, has become the canonical theory of capital and interest in contemporary economics; for an exposition see Gravelle and Rees (2004). The nature and scope of this theoretical advance was not fully appreciated, however, until Hirshleifer's (1958) reexposition, so that Fisher did not live to see this theory's ultimate triumph.

Debt-Deflation

Main article: Debt deflation

Following the stock market crash of 1929 and the ensuing Great Depression, Fisher developed a theory called debt-deflation. According to the debt deflation theory, a sequence of effects of the debt bubble bursting occurs:

1. Debt liquidation and distress selling.2. Contraction of the money supply as bank loans are paid off.3. A fall in the level of asset prices.4. A still greater fall in the net worth of businesses, precipitating bankruptcies.5. A fall in profits.6. A reduction in output, in trade and in employment.7. Pessimism and loss of confidence.8. Hoarding of money.9. A fall in nominal interest rates and a rise in deflation adjusted interest rates.

Stock market crash of 1929

The stock market crash of 1929 and the subsequent Great Depression cost Fisher much of his personal wealth and academic reputation. He famously predicted, a few days before the crash, "Stock prices have reached what looks like a permanently high plateau." Irving Fisher stated on October 21 that the market was "only shaking out of the lunatic fringe" and went on to explain why he felt the prices still had not caught up with their real value and should go much higher. On Wednesday, October 23, he announced in a banker’s meeting “security values in most instances were not inflated.” For months after the Crash, he continued to assure investors that a recovery was just around the corner. Once the Great Depression was in full force, he did warn that the ongoing drastic deflation was the cause of the disastrous cascading insolvencies then plaguing the American economy because deflation increased the real value of debts fixed in dollar terms. Fisher was so discredited by his 1929 pronouncements and by the failure of a firm he had started that few people took notice of his "debt-deflation" analysis of the Depression. People instead eagerly turned to the ideas of Keynes. Fisher's debt-deflation scenario has made something of a comeback since 1980 or so.

Personal ideals

The lay public perhaps knew Fisher best as a health campaigner and eugenicist. In 1898 he found that he had tuberculosis, the disease that killed his father. After three years in sanatoria, Fisher returned to work with even greater energy and with a second vocation as a health campaigner.

He advocated vegetarianism, avoiding red meat, and exercise, writing How to Live: Rules for Healthful Living Based on Modern Science, a USA best seller.

In 1912 he also became a member of the scientific advisory to the Eugenics Record Office and served as the secretary of the American Eugenics Society.

Fisher was also a strong believer in the now-ridiculed "focal sepsis" theory of physician Henry Cotton, who believed that mental illness was attributable to infectious material residing in the roots of the teeth, recesses in the bowels, and other places in the human body, and that surgical removal of this infectious material would cure the patient's mental disorder. Fisher believed in these theories so thoroughly that when his daughter Margaret Fisher was diagnosed with schizophrenia, Fisher had numerous sections of her bowel and colon removed at Dr. Cotton's hospital, eventually resulting in his daughter's death.[1]

Fisher was also an ardent supporter of the Prohibition of alcohol in the United States, and wrote three short books arguing that Prohibition was justified on the grounds of both public health and hygiene, as well as economic productivity and efficiency, and should therefore be strictly enforced by the United States government.[2]

American economist

born February 27, 1867, Saugerties, New York, U.S. died April 29, 1947, New Haven, Connecticut

American economist best known for his work in the field of capital theory. He also contributed to the development of modern monetary theory.

Fisher was educated at Yale University (B.A., 1888; Ph.D., 1891), where he remained to teach mathematics (1892–95) and economics (1895–1935). In The Purchasing Power of Money (1911), he developed the modern concept of the relationship between changes in the money supply and changes in general price levels. From 1912 to 1935, Fisher produced a total of 331 documents—including speeches, letters to newspapers, articles, reports to governmental bodies, circulars, and books—that ... (100 of 641 words)

Marginality

Constraints are conceptualized as a border or margin.[1] The location of the margin for any individual corresponds to his or her endowment, broadly conceived to include opportunities. This endowment is determined by many things including physical laws (which constrain how forms of energy and matter may be transformed), accidents of nature (which determine the presence of natural resources), and the outcomes of past decisions made both by others and by the individual himself or herself.

A value that holds true given particular constraints is a marginal value. A change that would be effected as or by a specific loosening or tightening of those constraints is a marginal change.

Neoclassical economics usually assumes that marginal changes are infinitesimals or limits. (Though this assumption makes the analysis less robust, it increases tractability.) One is therefore often told that “marginal” is synonymous with “very small”, though in more general analysis this may not be operationally true (and would not in any case be literally true). Frequently, economic analysis concerns the marginal values associated with a change of one unit of a resources, because decisions are often made in terms of units; marginalism seeks to explain unit prices in terms of such marginal values.

Marginal use

Main article: Marginal use

The marginal use of a good or service is the specific use to which an agent would put a given increase, or the specific use of the good or service that would be abandoned in response to a given decrease.[2]

Marginalism assumes, for any given agent, economically rationality and an ordering of possible states-of-the-world, such that, for any given set of constraints, there is an attainable state which is best in the eyes of that agent. Descriptive marginalism asserts that choice amongst the specific means by which various anticipated specific states-of-the-world (outcomes) might be effected is governed only by the distinctions amongst those specific outcomes; prescriptive marginalism asserts that such choice ought to be so governed.

On such assumptions, each increase would be put to the specific, feasible, previously unrealized use of greatest priority, and each decrease would result in abandonment of the use of lowest priority amongst the uses to which the good or service had been put.[2]

Marginal utility

Main article: Marginal utility

The marginal utility of a good or service is the utility of its marginal use. Under the assumption of economic rationality, it is the utility of its least urgent possible use from the best feasible combination of actions in which its use is included.

In 20th century mainstream economics, the term “utility” has come to be formally defined as a quantification capturing preferences by assigning greater quantities to states, goods, services, or applications that are of higher priority. But marginalism and the concept of marginal utility predate the establishment of this convention within economics. The more general conception of utility is that of use or usefulness, and this conception is at the heart of marginalism; the term “marginal utility” arose from translation of the German “Grenznutzen”, [2][3] which literally means border use, referring directly to the marginal use, and the more general formulations of marginal utility do not treat quantification as an essential feature.[4] On the other hand, none of the early marginalists insisted that utility were not quantified,[5][6] some indeed treated quantification as an essential feature, and those who did not still used an assumption of quantification for expository purposes. In this context, it is not surprising to find many presentations that fail to recognize a more general approach.

[edit] Quantified marginal utility

Under the special case in which usefulness can be quantified, the change in utility of moving from state S1 to state S2 is

Moreover, if S1 and S2 are distinguishable by values of just one variable which is itself quantified, then it becomes possible to speak of the ratio of the marginal utility of the change in

to the size of that change:

(where “c.p.” indicates that the only independent variable to change is ).

Mainstream neoclassical economics will typically assume that

is well defined, and use “marginal utility” to refer to a partial derivative

The “law” of diminishing marginal utility

The “law” of diminishing marginal utility (also known as a “Gossen's First Law”) is that, ceteris paribus, as additional amounts of a good or service are added to available resources, their marginal utilities are decreasing. This “law” is sometimes treated as a tautology, sometimes as something proven by introspection, or sometimes as a mere instrumental assumption, adopted only for its perceived predictive efficacy. Actually, it is not quite any of these things, though it may have aspects of each. The “law” does not hold under all circumstances, so it is neither a tautology nor otherwise proveable; but it has a basis in prior observation.

An individual will typically be able to partially order the potential uses of a good or service. If there is scarcity, then a rational agent will satisfy wants of highest possible priority, so that no want is avoidably sacrificed to satisfy a want of lower priority. In the absence of complementarity across the uses, this will imply that the priority of use of any additional amount will be lower than the priority of the established uses, as in this famous example:

A pioneer farmer had five sacks of grain, with no way of selling them or buying more. He had five possible uses: as basic feed for himself, food to build strength, food for his chickens for dietary variation, an ingredient for making whisky and feed for his parrots to amuse him. Then the farmer lost one sack of grain. Instead of reducing every activity by a fifth, the farmer simply starved the parrots as they were of less utility than the other four uses; in other words they were on the margin. And it is on the margin, and not with a view to the big picture, that we make economic decisions.[7]

Diminishing marginal utility, given quantification

However, if there is a complementarity across uses, then an amount added can bring things past a desired tipping point, or an amount subtracted cause them to fall short. In such cases, the marginal utility of a good or service might actually be increasing.

Without the presumption that utility is quantified, the diminishing of utility should not be taken to be itself an arithmetic subtraction. It is the movement from use of higher to lower priority, and may be no more than a purely ordinal change.[4][8]

When quantification of utility is assumed, diminishing marginal utility corresponds to a utility function whose slope is continually or continuously decreasing. In the latter case, if the function is also smooth, then the “law” may be expressed

Neoclassical economics usually supplements or supplants discussion of marginal utility with indifference curves, which were originally derived as the level curves of utility functions,[9] or can be produced without presumption of quantification,[4] but are often simply treated as axiomatic. In the absence of complementarity of goods or services, diminishing marginal utility implies convexity of indifference curves[4][9] (though such convexity would also follow from quasiconcavity of the utility function).

[edit] Marginal rate of substitution

Main article: Marginal rate of substitution

The rate of substitution is the least favorable rate at which an agent is willing to exchange units of one good or service for units of another. The marginal rate of substitution (“MRS”) is the rate of substitution at the margin — in other words, given some constraint(s).

When goods and services are discrete, the least favorable rate at which an agent would trade A for B will usually be different from that at which she would trade B for A:

But, when the goods and services are continuously divisible, in the limiting case

and the marginal rate of substitution is the slope of the indifference curve (multiplied by − 1).

If, for example, Lisa will not trade a goat for anything less than two sheep, then her

And if she will not trade a sheep for anything less than two goats, then her

But if she would trade one gram of banana for one ounce of ice cream and vice versa, then

When indifference curves (which are essentially graphs of instantaneous rates of substitution) and the convexity of those curves are not taken as given, the “law” of diminishing marginal utility is invoked to explain diminishing marginal rates of substitution — a willingness to accept fewer units of good or service A in substitution for B as one's holdings of A grow relative to

those of B. If an individual has a stock or flow of a good or service whose marginal utility is less than would be that of some other good or service for which he or she could trade, then it is in his or her interest to effect that trade. Of course, as one thing is traded-away and another is acquired, the respective marginal gains or losses from further trades are now changed. On the assumption that the marginal utility of one is diminishing, and the other is not increasing, all else being equal, an individual will demand an increasing ratio of that which is acquired to that which is sacrificed. (One important way in which all else might not be equal is when the use of the one good or service complements that of the other. In such cases, exchange ratios might be constant.[4]) If any trader can better his or her own marginal position by offering an exchange more favorable to other traders with desired goods or services, then he or she will do so.

[edit] Marginal cost

Main article: Marginal cost

At the highest level of generality, a marginal cost is a marginal opportunity cost. In most contexts, however, “marginal cost” will refer to marginal pecuniary cost — that is to say marginal cost measured by forgone money.

A thorough-going marginalism sees marginal cost as increasing under the “law” of diminishing marginal utility, because applying resources to one application reduces their availability to other applications. Neoclassical economics tends to disregard this argument, but to see marginal costs as increasing in consequence of diminishing returns.

[edit] Application to price theory

Marginalism and neoclassical economics typically explain price formation broadly through the interaction of curves or schedules of supply and demand. In any case buyers are modelled as pursuing typically lower quantities, and sellers offering typically higher quantities, as price is

increased, with each being willing to trade until the marginal value of what they would trade-away exceeds that of the thing for which they would trade.

[edit] Demand

Demand curves are explained by marginalism in terms of marginal rates of substitution.

At any given price, a prospective buyer has some marginal rate of substitution of money for the good or service in question. Given the “law” of diminishing marginal utility, or otherwise given convex indifference curves, the rates are such that the willingness to forgo money for the good or service decreases as the buyer would have ever more of the good or service and ever less money. Hence, any given buyer has a demand schedule that generally decreases in response to price (at least until quantity demanded reaches zero). The aggregate quantity demanded by all buyers is, at any given price, just the sum of the quantities demanded by individual buyers, so it too decreases as price increases.

[edit] Supply

Both neoclassical economics and thorough-going marginalism could be said to explain supply curves in terms of marginal cost; however, there are markèd differences in conceptions of that cost.

Marginalists in the tradition of Marshall and neoclassical economists tend to represent the supply curve for any producer as a curve of marginal pecuniary costs objectively determined by physical processes, with an upward slope determined by diminishing returns.

A more thorough-going marginalism represents the supply curve as a complementary demand curve — where the demand is for money and the purchase is made with a good or service.[10] The shape of that curve is then determined by marginal rates of substitution of money for that good or service.

[edit] Markets

By confining themselves to limiting cases in which sellers or buyers are both “price takers” — so that demand functions ignore supply functions or vice versa — Marshallian marginalists and neoclassical economists produced tractable models of “pure” or “perfect” competition and of various forms of “imperfect” competition, which models are usually captured by relatively simple graphs. Other marginalists have sought to present more realistic explanations, [11][12] but this work has been relatively uninfluential on the mainstream of economic thought.

[edit] The paradox of water and diamonds

Main article: Paradox of value

The “law” of diminishing marginal utility is said to explain the “paradox of water and diamonds”, most commonly associated with Adam Smith[13] (though recognized by earlier

thinkers).[14] Human beings cannot even survive without water, whereas diamonds were in Smith's day mere ornamentation or engraving bits. Yet water had a very small price, and diamonds a very large price, by any normal measure. Marginalists explained that it is the marginal usefulness of any given quantity that matters, rather than the usefulness of a class or of a totality. For most people, water was sufficiently abundant that the loss or gain of a gallon would withdraw or add only some very minor use if any; whereas diamonds were in much more restricted supply, so that the lost or gained use were much greater.

That is not to say that the price of any good or service is simply a function of the marginal utility that it has for any one individual nor for some ostensibly typical individual. Rather, individuals are willing to trade based upon the respective marginal utilities of the goods that they have or desire (with these marginal utilities being distinct for each potential trader), and prices thus develop constrained by these marginal utilities.

The “law” is not about geology or cosmology, so does not tell us such things as why diamonds are naturally less abundant on the earth than is water, but helps us to understand how relative abundance affects the value imputed to a given diamond and the price of diamonds in a market.

[edit] History

This section requires expansion.

[edit] Proto-marginalist approaches

Perhaps the essence of a notion of diminishing marginal utility can be found in Aristotle's Politics, whereïn he writes

external goods have a limit, like any other instrument, and all things useful are of such a nature that where there is too much of them they must either do harm, or at any rate be of no use[15]

(There has been markèd disagreement about the development and rôle of marginal considerations in Aristotle's' value theory.[16][17][18][19][20])

A great variety of economists concluded that there was some sort of inter-relationship between utility and rarity that effected economic decisions, and in turn informed the determination of prices.[21]

Eighteenth-century Italian mercantilists, such as Antonio Genovesi, Giammaria Ortes, Pietro Verri, Marchese Cesare di Beccaria, and Count Giovanni Rinaldo Carli, held that value was explained in terms of the general utility and of scarcity, though they did not typically work-out a theory of how these interacted.[22] In Della moneta (1751), Abbé Ferdinando Galiani, a pupil of Genovesi, attempted to explain value as a ratio of two ratios, utility and scarcity, with the latter component ratio being the ratio of quantity to use.

Anne Robert Jacques Turgot, in Réflexions sur la formation et la distribution de richesse (1769), held that value derived from the general utility of the class to which a good belonged, from comparison of present and future wants, and from anticipated difficulties in procurement.

Like the Italian mercantists, Étienne Bonnot, Abbé de Condillac saw value as determined by utility associated with the class to which the good belong, and by estimated scarcity. In De commerce et le gouvernement (1776), Condillac emphasized that value is not based upon cost but that costs were paid because of value.

This last point was famously restated by the Nineteenth Century proto-marginalist, Richard Whately, who in Introductory Lectures on Political Economy (1832) wrote

It is not that pearls fetch a high price because men have dived for them; but on the contrary, men dive for them because they fetch a high price.[23]

(Whately's student Senior is noted below as an early marginalist.)

[edit] Marginalists before the Revolution

The first unambiguous published statement of any sort of theory of marginal utility was by Daniel Bernoulli, in “Specimen theoriae novae de mensura sortis”.[24] This paper appeared in 1738, but a draft had been written in 1731 or in 1732.[25][26] In 1728, Gabriel Cramer produced fundamentally the same theory in a private letter.[27] Each had sought to resolve the St. Petersburg paradox, and had concluded that the marginal desirability of money decreased as it was accumulated, more specifically such that the desirability of a sum were the natural logarithm (Bernoulli) or square root (Cramer) thereof. However, the more general implications of this hypothesis were not explicated, and the work fell into obscurity.

In “A Lecture on the Notion of Value as Distinguished Not Only from Utility, but also from Value in Exchange”, delivered in 1833 and included in Lectures on Population, Value, Poor Laws and Rent (1837), William Forster Lloyd explicitly offered a general marginal utility theory, but did not offer its derivation nor elaborate its implications. The importance of his statement seems to have been lost on everyone (including Lloyd) until the early 20th century, by which time others had independently developed and popularized the same insight.[28]

In An Outline of the Science of Political Economy (1836), Nassau William Senior asserted that marginal utilities were the ultimate determinant of demand, yet apparently did not pursue implications, though some interpret his work as indeed doing just that.[29]

In “De la mesure de l’utilité des travaux publics” (1844), Jules Dupuit applied a conception of marginal utility to the problem of determining bridge tolls.[30]

In 1854, Hermann Heinrich Gossen published Die Entwicklung der Gesetze des menschlichen Verkehrs und der daraus fließenden Regeln für menschliches Handeln, which presented a marginal utility theory and to a very large extent worked-out its implications for the behavior of a market economy. However, Gossen's work was not well received in the Germany of his time,

most copies were destroyed unsold, and he was virtually forgotten until rediscovered after the so-called Marginal Revolution.

[edit] The Marginal Revolution

Marginalism eventually found a foot-hold by way of the work of three economists, Jevons in England, Menger in Austria, and Walras in Switzerland.

William Stanley Jevons first proposed the theory in “A General Mathematical Theory of Political Economy” (PDF), a little-noticed paper delivered in 1862 and published in 1863. He later presented the theory in The Theory of Political Economy (1871), which was fairly widely read but not much appreciated. Jevons' conception of utility was that in the hedonic tradition of Jeremy Bentham and of John Stuart Mill, and Jevons explained demand but not supply by reference to marginal utility.

Carl Menger presented the theory in Grundsätze der Volkswirtschaftslehre (translated as Principles of Economics) in 1871. Menger's presentation is peculiarly notable on two points. First, he took special pains to explain why individuals should be expected to rank possible uses and then to use marginal utility to decide amongst trade-offs. (For this reason, Menger and his followers are sometimes called “the Psychological School”, though they are more frequently known as “the Austrian School” or as “the Vienna School”.) Second, while his illustrative examples present utility as quantified, his essential assumptions do not.[8] Menger's work found a significant and appreciative audience.

Marie-Esprit-Léon Walras introduced the theory in Éléments d'économie politique pure, the first part of which was published in 1874. Walras's work found relatively few readers.

(An American, John Bates Clark, is sometimes also mentioned in this context. But, while Clark independently arrived at a marginal utility theory, he did little to advance it until it was clear that the followers of Jevons, Menger, and Walras were revolutionizing economics. Nonetheless, his contributions thereafter were profound.)

[edit] The second generation

Although the Marginal Revolution flowed from the work of Jevons, Menger, and Walras, their work might have failed to enter the mainstream were it not for a second generation of economists. In England, the second generation were exemplified by Philip Henry Wicksteed, by William Smart, and by Alfred Marshall; in Austria by Eugen von Böhm-Bawerk and by Friedrich von Wieser; in Switzerland by Vilfredo Pareto; and in America by Herbert Joseph Davenport and by Frank A. Fetter.

There were significant, distinguishing features amongst the approaches of Jevons, Menger, and Walras, but the second generation did not maintain distinctions along national or linguistic lines. The work of von Wieser was heavily influenced by that of Walras. Wicksteed was heavily influenced by Menger. Fetter referred to himself and Davenport as part of “the American Psychological School”, named in imitation of the Austrian “Psychological School”. (And Clark's

work from this period onward similarly shows heavy influence by Menger.) William Smart began as a conveyor of Austrian School theory to English-language readers, though he fell increasingly under the influence of Marshall.[31]

Böhm-Bawerk was perhaps the most able expositor of Menger's conception.[31][32] He was further noted for producing a theory of interest and of profit in equilibrium based upon the interaction of diminishing marginal utility with diminishing marginal productivity of time and with time preference.[7] (This theory was adopted in full and then further developed by Knut Wicksell[33]

and, with modifications including formal disregard for time-preference, by Wicksell's American rival Irving Fisher.[34])

Marshall was the second-generation marginalist whose work on marginal utility came most to inform the mainstream of neoclassical economics, especially by way of his Principles of Economics, the first volume of which was published in 1890. Marshall constructed the demand curve with the aid of assumptions that utility was quantified, and that the marginal utility of money was constant (or nearly so). Like Jevons, Marshall did not see an explanation for supply in the theory of marginal utility, so he synthesized an explanation of demand thus explained with supply explained in a more classical manner, determined by costs which were taken to be objectively determined. (Marshall later actively mischaracterized the criticism that these costs were themselves ultimately determined by marginal utilities.[10])

[edit] The Marginal Revolution and Marxism

The doctrines of marginalism and the Marginal Revolution are often interpreted as somehow a response to Marxist economics.[35] In fact, the first volume of Das Kapital was not published until July 1867, after the works of Jevons, Menger, and Walras were written or well under way; and Marx was still a relatively obscure figure when these works were completed. (On the other hand, Hayek or Bartley has suggested that Marx may have come across the works of one or more of these figures, and that his inability to formulate a viable critique may account for his failure to complete any further volumes of Kapital.[36])

Nonetheless, it is not unreasonable to suggest that part of what contributed to the success of the generation who followed the preceptors of the Revolution was their ability to formulate straight-forward responses to Marxist economic theory.[35] The most famous of these was that of Böhm-Bawerk, “Zum Abschluss des Marxschen Systems” (1896),[37] but the first was Wicksteed's “The Marxian Theory of Value. Das Kapital: a criticism” (1884,[38] followed by “The Jevonian criticism of Marx: a rejoinder” in 1885[39]). The most famous early Marxist responses were Rudolf Hilferding's Böhm-Bawerks Marx-Kritik (1904)[40] and Политической экономии рантье (The Economic Theory of the Leisure Class, 1914) by Никола̀́й Ива̀́нович Буха̀́рин (Nikolai Bukharin).[41]

(It might also be noted that some followers of Henry George similarly consider marginalism and neoclassical economics a reaction to Progress and Poverty, which was published in 1879.[42])

[edit] Eclipse

In his 1881 work Mathematical Psychics, Francis Ysidro Edgeworth presented the indifference curve, deriving its properties from marginalist theory which assumed utility to be a differentiable function of quantified goods and services. But it came to be seen that indifference curves could be considered as somehow given, without bothering with notions of utility.

In 1915, Евгений Евгениевич Слуцкий (Eugen Slutsky) derived a theory of consumer choice solely from properties of indifference curves.[43] Because of the World War, the Bolshevik Revolution, and his own subsequent loss of interest, Slutsky's work drew almost no notice, but similar work in 1934 by John Richard Hicks and R. G. D. Allen[44] derived much the same results and found a significant audience. (Allen subsequently drew attention to Slutksy's earlier accomplishment.)

Although some of the third generation of Austrian School economists had by 1911 rejected the quantification of utility while continuing to think in terms of marginal utility, [45] most economists presumed that utility must be a sort of quantity. Indifference curve analysis seemed to represent a way of dispensing with presumptions of quantification, albeït that a seemingly arbitrary assumption (admitted by Hicks to be a “rabbit out of a hat”[46]) about decreasing marginal rates of substitution[47] would then have to be introduced to have convexity of indifference curves.

For those who accepted that superseded marginal utility analysis had been superseded by indifference curve analysis, the former became at best somewhat analogous to the Bohr model of the atom — perhaps pedagogically useful, but “old fashioned” and ultimately incorrect.[47][48]

[edit] Revival

When Cramer and Bernoulli introduced the notion of diminishing marginal utility, it had been to address a paradox of gambling, rather than the paradox of value. The marginalists of the revolution, however, had been formally concerned with problems in which there was neither risk nor uncertainty. So too with the indifference curve analysis of Slutsky, Hicks, and Allen.

The expected utility hypothesis of Bernoulli et alii was revived by various 20th century thinkers, perhaps most notably Ramsey (1926),[49] v. Neumann and Morgenstern (1944),[50] and Savage (1954).[51] Although this hypothesis remains controversial, it brings not merely utility but a quantified conception thereof back into the mainstream of economic thought, and would dispatch the Ockhamistic argument.[48] (It should perhaps be noted that, in expected utility analysis, the “law” of diminishing marginal utility corresponds to what is called “risk aversion”.)

Meanwhile, the Austrian School continues to develop its ordinalist notions of marginal utility analysis, formally demonstrating that from them proceed the decreasing marginal rates of substitution of indifference curves.[4]

[edit] Criticisms of marginalism

Marginalism has been criticised for being extremely abstract, as “unobservable, unmeasurable and untestable”.[52] Marginal utility is subjective, as the value of an additional unit of consumption is based on the individual's circumstances. However, margins (constraints) are

often observable, as are patterns of choice; hence the general form of marginalism is in theory observable and testable. The special case of quantification of utility is more problematic, but the expected utility hypothesis represents a testable version of the theory with quantification. (Nonetheless, though confirmation of the expected utility hypothesis might have confirm quantification, the specific measure would not thus be found, as data that were fit by any proposed measure would be equally well fit by any affine transformation of that proposed measure.)

However, observed patterns of choice in test situations often seem not to correspond to an ordering, and the expected utility hypothesis has been falsified as description. (See the article on behavioral economics, and perhaps especially that on the Ellsberg paradox or that on the Allais problem.) Many behavioral economists argue that people often follow simple rules of thumb instead of engaging in a mental process of maximizing some function. The reply from some marginalist and neoclassical economists is that these rules of thumb have been shaped by experience so that they give very nearly the same result as maximizing and that, moreover, use of rules of thumb is itself an act of optimization insofar as the decision-making process itself entails direct costs.

The theory is attacked for downplaying the rôle of cost of production in price determination in favor of a focus on individual's tastes and preferences. In its most extreme Austrian School version, marginalism denies that a purely objective, cost-based component exists at all. Rather, the Austrian School argues that costs of production pervasively involve individual preferences for labor vs. leisure and saving vs. consumption.

[edit] Marxist attacks on marginalism

Main article: Marxism

Karl Marx died before marginalism became the interpretation of economic value accepted by mainstream economics. His theory was based on the labor theory of value, which distinguishes between exchange value and use value. In his Capital he rejected the explanation of long-term market values by supply and demand:

Nothing is easier than to realize the inconsistencies of demand and supply, and the resulting deviation of market-prices from market-values. The real difficulty consists in determining what is meant by the equation of supply and demand.

[...]

If supply equals demand, they cease to act, and for this very reason commodities are sold at their market-values. Whenever two forces operate equally in opposite directions, they balance one another, exert no outside influence, and any phenomena taking place in these circumstances must be explained by causes other than the effect of these two forces. If supply and demand balance one another, they cease to explain anything, do not affect market-values, and therefore leave us so much more in the dark about the reasons why the market-value is expressed in just this sum of money and no other.[53]

In his early response to marginalism, Nikolai Bukharin argued that "the subjective evaluation from which price is to be derived really starts from this price",[54] concluding:

Whenever the Böhm-Bawerk theory, it appears, resorts to individual motives as a basis for the derivation of social phenomena, he is actually smuggling in the social content in a more or less disguised form in advance, so that the entire construction becomes a vicious circle, a continuous logical fallacy, a fallacy that can serve only specious ends, and demonstrating in reality nothing more than the complete barrenness of modern bourgeois theory.[55]

Similarly a later Marxist critic, Ernest Mandel, argued that marginalism was "divorced from reality", ignored the rôle of production, and that:

It is, moreover, unable to explain how, from the clash of millions of different individual "needs" there emerge not only uniform prices, but prices which remain stable over long periods, even under perfect conditions of free competition. Rather than an explanation of constants, and of the basic evolution of economic life, the "marginal" technique provides at best an explanation of ephemeral, short-term variations.[56]

Maurice Dobb argued that prices derived through marginalism depend on the distribution of income. The ability of consumers to express their preferences is dependent on their spending power. As the theory asserts that prices arise in the act of exchange, Dobb argues that it cannot explain how the distribution of income affects prices and consequently cannot explain prices.[57]

Dobb also criticized the motives behind marginal utility theory. Jevons wrote, for example, "so far as is consistent with the inequality of wealth in every community, all commodities are distributed by exchange so as to produce the maximum social benefit." (See Fundamental theorems of welfare economics.) Dobb contended that this statement indicated that marginalism is intended to insulate market economics from criticism by making prices the natural result of the given income distribution.[57]

[edit] Marxist adaptations to marginalism

Some economists strongly influenced by the Marxian tradition such as Oskar Lange, Włodzimierz Brus, and Michal Kalecki have attempted to integrate the insights of classical political economy, marginalism, and neoclassical economics. They believed that Marx lacked a sophisticated theory of prices, and neoclassical economics lacked a theory of the social frameworks of economic activity. Some other Marxists have also argued that on one level there is no conflict between marginalism and Marxism: one could employ a marginalist theory of supply and demand within the context of a “big picture” understanding of the Marxist notion that capitalists exploit labor.[

Irving Fisher, 1867-1947.

Irving Fisher was one of the earliest American Neoclassicals of unusual mathematical sophistication.  He made numerous important contributions to the Neoclassical Marginalist Revolution, of which the following are but a sample:

(1) his contributions to the Walrasian theory of equilibrium price (he also invented the indifference curve device) in 1892; (2) his volumes on the theory of capital and investment (1896, 1898, 1906, 1907, 1930) which brought the Austrian intertemporal theories into the English-speaking world, wherein he introduced the famous distinction between "stocks" and flows", the Fisher Separation Theorem and the loanable funds theory of interest rates.(3) his famous resurrection of the Quantity Theory of Money (1911, 1932, 1935); (4) the theory of index numbers (1922); (5) the Phillips Curve (1926) (6) his debt-deflation theory (1933) which is echoed in Post Keynesian economics.

This Yale economist was an eccentric and colorful figure.  When Irving Fisher wrote his 1892 dissertation, he constructed a remarkable machine equipped with pumps, wheels, levers and pipes in order to illustrate his price theory - see here for pictures of his draft and his first and second prototypes.  Socially, he was an avid advocate of eugenics and health food diets.   He  made a fortune with his visible index card system - known today as the rolodex - and advocated the establishment of an 100% reserve requirement banking system   His fortune was lost and his reputation was severely marred by the 1929 Wall Street Crash, when just days before the crash, he was reassuring investors that stock prices were not overinflated but, rather, had achieved a new, permanent plateau.

Major works of Irving Fisher

Mathematical Investigations in the Theory of Value and Prices, 1892. Appreciation and Interest, 1896. "The Role of Capital in Economic Theory", 1897, EJ. "Precedents for Definining Capital" , 1898, QJE. The Nature of Capital and Income, 1906. The Rate of Interest, 1907. National Vitality, its wastes and conservation, 1910. "The Equation of Exchange, 1896-1910", 1911, AER "Recent Changes in Price Levels and Their Causes", 1911, AER - discussion The Purchasing Power of Money: Its determination and relation to credit, interest and

crises, 1911. ""The Equation of Exchange" for 1911, and Forecast", 1912, AER "An International Commission on Cost of Living", 1912, AER "Will the Present Upward Trend of World Prices Continue?", 1912, AER Elementary Principles of Economics, 1912. "A Remedy for the Rising Cost of Living: Standardizing the Dollar", 1913, AER ""The Equation of Exchange" for 1912, and Forecast", 1913, AER "The Impatience Theory of Interest", 1913, AER. "Objections to a Compensated Dollar Answered", 1914, AER

Why is the Dollar Shrinking? A study in the high cost of living, 1914. After the war, what?  A plea for a league of peace.  1914. "Review of Auspitz and Lieben's Theory of Price", 1915, AER "Some Contributions of the War to Our Knowledge of Money and Prices (Abstract)",

1918, AER "Is "Utility" the Most Suitable Term for the Concept It is Used to Denote?", 1918, AER. "Economists in Public Service", 1919, AER. "Stabilizing the Dollar", 1919, AER "Consideration of the Proposal to Stabilize the Unit of Money: Rejoinder", 1919, AER Stabilizing the Dollar, 1920. The Making of Index Numbers: A study of their varieties, tests and reliability, 1922. "The Statistical Relation Between Unemployment and Price Changes", 1926,

International Labor Review Prohibition at its Worst, 1927. The Money Illusion, 1928. The Theory of Interest: As determined by the impatience to spend income and opportunity

to invest it. , 1930. Booms and Depressions, 1932. "The Debt-Deflation Theory of Great Depressions", 1933, Econometrica. Inflation, 1933. Stamp Scrip, 1933. 100% Money, 1935.

Resources on Irving Fisher

HET Pages: Quantity Theory of Money, Fisher's Theory of Investment, the Neoclassical Macromodel

Irving Fisher's 1892 physical prototype of price model - Draft, First Version, Second Version.

  "Fisher's Capital and Income" , by Thorstein Veblen, 1908, Political Science Quarterly.   "Fisher's Rate of Interest" , by Thorstein Veblen 1909, Political Science Quarterly. "The Impatience Theory of Interest" by Henry R. Seager, 1912, AER, "Comment", 1913,

AER "Review of Fisher's Elementary Principles of Economics", by T.N. Carver, 1913, AER "Review of Fisher's Why is the Dollar Shrinking?" by Everett W. Goodhue, 1914, AER "Consideration of the Proposal to Stabilize the Unit of Money" by G. H. Knibbs, 1919,

AER "How to Compute Equilibrium Prices in 1891"  by W.C. Brainard and H.E. Scarf, 2000 -

great explanation of Fisher's 1892 hydraulic machine. "Fisher and Wicksell on the quantity theory" by Thomas M. Humphrey, 1997, Quarterly

Review of FRB Richmond Irving Fisher and the Cowles Commission Mark Underwood's Page on Black Thursday - New York Times Headlines, including

statements by Irving Fisher Portrait of Irving Fisher with a Beard Irving Fisher Papers at Yale

Fisher entry in Britannica.com Fisher Page at McMaster Fisher Page at Akamac Fisher Page at Laura Forgette Irving Fisher Conference at the Cowles Foundation "Alcohol Prohibition was a Failure" by Mark Thornton, at Policy Analysis, relating Irving

Fisher's 1927 findings Yale University - economics home page. Irving Fisher Page in Spanish

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Economist, born in Saugerties, New York, USA. One of the most colourful economists, he is remembered for his brilliant and enduring exposition of economic theory. From 1892 until his retirement in 1935, he taught at Yale University. His contributions include crystallizing the distinctions between stocks and flows, clarifying the science of accounting at the individual level, and for explaining the economy as a whole. His invention of a visible index file system led to considerable financial success, but he suffered heavy losses in the stock market crash of 1929. In his later years he also became known for his promotion of nutritional cures for diseases.

Portions of the summary below have been contributed by Wikipedia.

Irving Fisher (February 27, 1867 Saugerties, New York — April 29, 1947, New York) was an American economist, health campaigner, and eugenicist. Several terms are named after him, including the Fisher equation, Fisher hypothesis and Fisher separation theorem.

Biography and Contributions

Early Adulthood

His father was a teacher and Congregational minister, and the son was brought up to believe he must be a useful member of society.

Fisher's best subject was mathematics, but economics better matched his social concerns. Fisher did not realise at the outset that there was already a substantial European literature on mathematical economics. While his books and articles on economic topics exhibited unusual (for the time) mathematical sophistication, Fisher always wished to bring his analysis to life and to present his theories in a very lucid manner.

This research into basic theory did not touch the great social issues of the day. Fisher’s Appreciation and interest was an abstract analysis of the behaviour of interest rates when the price level is changing. It emphasised the distinction between real and monetary rates of interest which is fundamental to the modern analysis of inflation. However Fisher believed that investors and savers—people in general—were afflicted in varying degrees by “money illusion”;

Later life

Fisher was a prolific writer, producing journalism, as well as technical books and articles, addressing the problems of the First World War, the prosperous 1920s and the depressed 1930s.

The stock market crash of 1929 and the subsequent Great Depression cost Fisher much of his personal wealth and academic reputation. Once the Great Depression was in full force, he did warn that the ongoing drastic deflation was the cause of the disastrous cascading insolvencies then plaguing the American economy, because deflation increased the real value of debts fixed in dollar terms. Fisher was so discredited by his 1929 pronouncements, and by the failure of a firm he had started, that few people took notice of his "debt-deflation" analysis of the Depression. Fisher's debt-deflation scenario has made something of a comeback since 1980 or so.

Money and the price level

Fisher's theory of the price level was the following variant of the quantity theory of money. Fisher then proposed that these variables are interrelated by the Equation of exchange: MV=PT.

Fisher was also the first economist to distinguish clearly between real and nominal interest rates, concluding that the real interest rate equals the nominal interest rate minus the expected inflation rate.

For more than forty years, Fisher elaborated his vision of the damaging “dance of the dollar” and devised schemes to “stabilise” money, i.e. He was one of the first to subject macroeconomic data, including the money stock, interest rates, and the price level, to statistical analysis. Index numbers played an important role in his monetary theory, and his book The Making of Index Numbers has remained influential down to the present day.

The theory of interest and capital

While most of Fisher's energy went into "causes" and business ventures, and the better part of his scientific effort was devoted to monetary economics, he is best remembered today for his theory of interest and capital, studies of an ideal world from which the real world deviated at its peril. His most enduring intellectual work has been his theory of capital, investment, and interest rates, first exposited in his 1906 The Nature of Capital and Income and 1907 The Rate of Interest. His 1930 treatise, The Theory of Interest, summed up a lifetime's work on capital, capital budgeting, credit markets, and the determinants of interest rates, including the rate of inflation.

Fisher was the first to see that subjective economic value is not only a function of the amount of goods and services owned or exchanged, but also of the moment in time when they are purchased. The relative price of goods available at a future date, in terms of goods sacrificed now, is measured by the interest rate. Fisher made free use of the standard diagrams used to teach undergraduate economics, but labelled the axes "consumption now" and "consumption next period" instead of, e.g., "apples" and "oranges." The resulting theory, one of considerable power and insight, was exposited in considerable detail in The Theory of Interest;

This theory, since generalized to the case of K goods and N periods (including the case of infinitely many periods) using the notion of a vector space, has become the canonical theory of capital and interest in contemporary economics; The nature and scope of this theoretical advance was not fully appreciated, however, until Hirshleifer's (1958) reexposition, so that Fisher did not live to see his theory's ultimate triumph.

Selected publications

Fisher, Irving Norton, 1961. Compiled by Fisher's son; The Purchasing Power of Money: Its Determination and Relation to Credit, Interest, and Crises. The Theory of Interest. 1933, "The debt-deflation theory of great depressions," Econometrica. Irving Fisher: A Biography. Fisher, Irving Norton, 1956. Jack Hirshleifer, 1958, "The Theory of Optimal Investment Decisions," Journal of Political Economy 66: 329-352. Sasuly, Max, 1947, "Irving Fisher and Social Science," Econometrica 15: 255-78. Thaler, Richard, 1999, "Irving Fisher: Behavioral Economist," American Economic Review. James Tobin, 1987, "Fisher, Irving" in The New Palgrave: A Dictionary of Economics, Vol.

Encyclopedia of World Biography on Irving Fisher

The American economist Irving Fisher (1867-1947) made significant and original contributions in the fields of economics, mathematics, statistics, demography, public health and sanitation, and public affairs.

Irving Fisher was born in Saugerties, N.Y., on Feb. 27, 1867. He received his doctoral degree in mathematics at Yale in 1891. From 1892 until 1895 he taught mathematics at Yale; in 1895 he joined the faculty of political economy, where he remained until his retirement as professor emeritus in 1935.

It is virtually impossible to do justice to Fisher's many contributions to economics and statistics, but his writings on monetary theory and policy and index numbers have earned special acclaim. He brought to his writings the lucidity, analytical precision, and rigor of an accomplished mathematician. In The Purchasing Power of Money (1911) Fisher completely recast the theory of money into his classical quantity-theory-of-money equation MV + M'V' = PQ, which made the purchasing power of money (or its reciprocal, the general price level P) completely determined by the stock of money in circulation M, its velocity of circulation V, the volume of bank deposits M', their velocity of circulation V', and the total volume of transactions Q. Fisher translated his theory into a policy prescription of "100 percent money" (all bank deposits should be backed by 100 percent reserves rather than fractional reserves, used then and now by virtually all banking systems) on the grounds that such a policy would control large business cycles. He spent a large part of his private fortune promoting (unsuccessfully) the policy.

Fisher's The Theory of Interest, which draws heavily from John Rae and Eugen von Böhm-Bawerk, added clarity and rigor to one of the most complex concepts in economics. In his theory the rate of interest is based on the supply of savings and on the demand for capital as determined by the present and future outlook for investment opportunities. He also distinguished between the nominal and real rates of interest and developed the concepts of positive, negative, and neutral time preferences. Fisher's theory anticipated the later works of members of the Cambridge school.

Fisher made significant and original contributions in statistical theory, econometrics, and index number theory. The Making of Index Numbers (1922) became a standard reference on the subject. After a methodical and quantitative analysis of various index number formulations, he developed his "ideal" index, the geometric mean of the Paasche and Laspeyre indexes. He considered this formulation "ideal" because it met his "time reversal" and "factor reversal" tests.

It has been said of Fisher's contributions to economics and statistics that he built grand columns and arches but he never quite completed the intellectual

edifice that could be designated the Fisher theory or the Fisher economic system. It can also be said that he laid solid foundations on which others built their edifices.

What was Irving Fisher's sign?

Irving Fisher was a Pisces.

Where did Irving Fisher die?

Irving Fisher died in New Haven, Connecticut in the United States

Personal Ideals

The lay public perhaps knew Fisher best as a health campaigner and eugenicist. After three years in sanatoria, Fisher returned to work with even greater energy and with a second vocation as a health campaigner.

In 1912 he also became a member of the scientific advisory to the Eugenics Record Office and served as the secretary of the American Eugenics Society.