Irving Fisher Made One of the First Attempts to Dismiss the Business Cycle as an Independent Economic Concept

In 1891, Fisher wrote the first dissertation in economics at Yale University, Mathematical Investigations in the Theory of Value and Prices (1892). It was directed in part by members of the Yale mathematics faculty and became a true landmark in the development of mathematical economics. The use of mathematics in economics spread in the first half of the twentieth century and came to dominate the economics profession in the second half of the century. It now enjoys near complete supremacy in graduate programs and in the leading academic journals devoted to economics. Likewise, the general equilibrium theorizing from his dissertation has also become the stock in trade of mainstream economics.

Fisher (1913) also changed how the economics profession viewed the quantity theory of money. He converted the classical view of the quantity theory from a theory into a mechanism that could (and should) be manipulated in order to stabilize the value of money. He presented his views in The Purchasing Power of Money, where he introduced the concept of a “compensated dollar.” He wanted to change our notion of the dollar from one of a coin with a constant weight of gold to one of a currency that had constant purchasing power. Fisher is therefore credited with forming the foundations of monetarism and the monetary policy rules used today by central bankers.

Fisher’s development of index numbers as a method of measuring the purchasing power of the dollar is also a landmark in the history of modem economic orthodoxy. His policy of price-level stabilization requires the central bank’s monetary policy to target and stabilize a price index. Fisher (1927) was one of the first to define and calculate index numbers and he even began to publish a weekly wholesale price index in the early 1920s. His foundational work The Making of Index Numbers showed the basis of how central bankers could conduct and review monetary policy. Modern mainstream economists today would view any other approach to monetary policy as unscientific and they are in agreement with Fisher that price-level inflation and deflation are inherently bad things, and that the value of the dollar (as measured by price indexes) should be stabilized like physical measurements such as the meter or kilogram. Fisher (1925) can also be credited with one of the first attempts to dismiss the business cycle as an independent economic concept.⁷ He even discovered what was to become the famous Phillips curve (which depicts an inverse relationship between inflation and unemployment) decades prior to A. W. Phillips. In this light, modem macroeconomics can be seen as nothing but a thick layer of dust on the foundations laid by Fisher.

⁷ See Fisher (1925) where he attempts to empirically show that it is the instability of the purchasing power of the dollar that is the problem, not the business cycle per se. Mainstream economists also dismiss the idea of the business cycle and that it is really just “shocks” and “real factors” that cause changes in the economy. See for example Milton Friedman's (1993) plucking model.

—Mark Thornton, “The Great Depression: Mises vs. Fisher,” Quarterly Journal of Austrian Economics 11, no. 3 (Fall 2008): 233, 233n7.