Irving Fisher, the premier American economist of the early twentieth century, was a pioneer in applying mathematical tools to economic theory. His objective was not only to develop theories with great explanatory power, but to develop them in operational terms. A cofounder of the Econometric Society, Fisher tried to base his theories on measurable variables that permitted his hypotheses to be tested.
Fisher's best-known works address the theories of money, capital, and interest. His equation of exchange is typical of his meticulous approach. Fisher began with an accounting identity: MV + M'V' = PT, where M is the quantity of currency, V is the velocity of currency in circulation, M' is the quantity of demand deposit dollars, V', the velocity of demand deposits, P is the price level, and T is total transactions in the economy. In this equation M, P, and T are directly observable and measurable. Hence, the equation can be solved for V, and Fisher's hypothesis that V and V' are stable can be tested. The equation of exchange remains central in resolving disputes about macroeconomic theory and policy disputes.
Two of Fisher's major works, The Purchasing Power of Money and The Theory of Interest,stressed the need for stable monetary policies. In the latter of these books, Fisher also distinguished nominal from real rates of interest. The nominal rate consists of the real rate, based on the real productivity of new capital investments, plus a premium for anticipated inflation on the part of lenders. The nominal rate, then, is the rate of interest stated in contracts for loans or purchases. The premium for expected inflation generates the Fisher effect: i = r + E(p).
In addition to teaching and research, Fisher was a successful inventor who patented scores of devices. Among other items, he invented a folding chair and the Rolodex (wheels used in most offices today to hold business cards and addresses). Income from his inventions enabled him to invest. He was very interested in public health issues and put time and money into the temperance movement, and he invested heavily in health food companies.
Few of the reform movements Fisher supported ultimately achieved their goals. For example, the constitutional amendment that prohibited alcoholic beverages was repealed after it ushered in an era of lawlessness. Some health food firms he invested in---Kellogg's and Post---now produce such sugary cereals as Coco-Puffs and Sugar Pops, which says something about where the profit motive can lead even the most well-intentioned of reforms.
Nevertheless, Fisher was an active participant in the social and economic debates of his time. His life was one of accomplished scholarship and useful invention. Fisher's ideas live on. Growing numbers of modern economists now echo his call for monetary stability.