For more than twenty five years, Fisher led a double career, as a University professor at Yale, and as an advocate for eugenics, engaging intensively into numerous committees, delivering speeches and conferences, writing articles, publishing books on health and eugenics. Reprint, New York, NY: Augustus M. Kelley, 1965. In 1898, at the age of thirty-two, Fisher was diagnosed with tuberculosis. Irving Fisher’s writings (Fisher, 1932, 1933) are indefectibly attached to the conventional view regarding deflation as a demand driven cumulative depression (fig. Oxford: Oxford University Press. We may take as our unit for study an actual historical case of great dis-equilibrium …. Dimand, Robert W. 1994. Reprinted in Fisher, 1997 (vol.10), 347-351. This puts the loan agreement made earlier in jeopardy. 16 Specifically in his lengthy contribution to the collective book The Natural Sciences and the Social Sciences. “As will be seen, the main conclusion of this book [Booms and Depressions] is that depressions are, for the most part, preventable and that their prevention requires a definite policy in which the Federal Reserve System must play an important role.” (ibid., viii), 42Fourthly, another set of medical analogies concerns the “contagion” process and the analysis of the propagation of the “virus” of depression in terms of “infections,” and “epidemics.”. In his essential work on the role of “natural images” in eighteenth century economic thought, I. Fisher, Irving. I did not then know certain scientific laws of depressions and I did not know, as well as I should, the historical background of conditions. Dimand, Robert W. 2003. And since we have found that these changes differ with different monetary standards, it ought naturally to follow that the virus of depression is carried from one country to another via a common monetary standard as the conduit. Then there were the international debts that we extended to Europe in the way of credit to help Europe to recover. And this proved true. New York, NY: Macmillan. I can now see that my failure was due to insufficient knowledge of both kinds, scientific and historical. It was not necessary, because the patient had grippe, that he should have pneumonia. … It is well that we face these failures and that, when we fail, we confess it with due humility. 1930b. Booms and Depressions 1933, "The debt deflation theory of great depressions," Econometrica. 13 Until the 1930s series of papers on economic fluctuations, Fisher’s declarations in favour of a methodological consonance between economics and physics had been both numerous and radical. (2007) "Learn From the Fall of Rome, U.S. (1933) "The Debt-Deflation Theory of Great Depressions," Econometrica 1 (4): 337-57, Grant, J. Prodiges et vertiges de l’analogie: de l’abus des belles-lettres dans la pensée. Possible “therapies” would thence imply a choice between “leaving recovery to nature” or “artificial respiration”—and Fisher clearly advocates in favour of the latter. Several studies prove that the empirical support for the validity of the debt deflation hypothesis as laid down by Fisher and Bernanke is substantial, especially against the background of the Great Depression. This fever analogy is essentially developed in Booms and Depressions, where both the “investment fever” and the “borrowing fever” refer to an “inexperienced” public, potentially ready to catch and propagate such fevers. American Economic Review, 9(2): 5-21. American Economic Review, Papers and Proceedings, 87(2): 442-444. The debt disease and the dollar disease, 3. One is ‘forced’ or imposed on the economic mechanism from outside. Irving Fisher on the International Transmission of Booms and Depressions through Monetary Standards. Yet, much to my amazement, I have been credited with having a theory of the whole phenomena. Epistemic analogies (“diagnosis”, “disease”, “fever”) are bound to legitimize a transfer of the analysis of the causes and consequences of medical diseases to the causes and consequences of economic diseases. My work in economics has been in writing special monographs on special small subjects and this one that had always seemed to me a pretty big subject and I was putting it off. With pivotal contributions including his Debt-Deflation Theory, Fisher Diagram and Ideal Index Number, his research in neoclassical economics influenced policymaking in his own day as well as during the recent financial crisis. Paris: Hachette. Boyer, Robert. The following explanation is highly pedagogical: By the debt disease, I mean that in 1929 we had a tremendous over-indebtedness. Cambridge: Cambridge University Press. “In a word, if we must suffer from the debt disease, why also catch the dollar disease? So-called cycle theory is merely one part of the study of economic dis-equilibrium.” (ibid., 337). These losses, bankruptcies and unemployment, lead to, pessimism and loss of confidence, which in turn lead to. Empirical support for the Bernanke transmission mechanism in the post–World War II economic activity is weaker. B. Cohen. These were ominous signs. % This quote relates to two different themes. But a year ago I began to study it, because I was asked to make an address upon it before the American Association for the Advancement of Science. After presenting Fisher’s “debt-deflation theory of depressions” (section 1), the paper focuses on “the two major economic maladies”, the debt disease and the dollar disease (section 2), and analyses these metaphors as designing a new frontier between what Georges Canguilhem named “the normal” and “the pathological” (section 3). 15Contrasting with this strong and repeated methodological belief, the 1930s writings on the debt-deflation theory (Fisher, 1932b, 1933a, 1934a, 1934b and 1934c) share a common shift away from this founding analogy between economics and physics, and replace it by another metaphorical transfer, between pathological diseases and economic diseases. Metaphor and Economics. These losses, bankruptcies, and unemployment, lead to (7) Pessimism and loss of confidence, which in turn lead to (8) Hoarding and slowing down still more the velocity of circulation. The two diseases act and react on each other. Études d’histoire et de philosophie des sciences. Dans une première section, l’article présente la théorie de la déflation par la dette ; une deuxième section est consacrée à l’analyse des « deux principales maladies économiques » décrites par Fisher, la maladie de la dette et la maladie du dollar ; la dernière section propose une analyse de ces métaphores en termes de déplacement de la frontière qui sépare, dans les deux domaines, le « normal » du « pathologique ». 31 “Before describing the currency reforms which, according to the diagnosis of this book, go to the root of the disease, I will run over briefly the leading ‘substantive cures’—not to disparage them as unimportant, but in the conviction that their importance is secondary. , “Palliatives and Remedies.” (ibid., 113 sq.). Fisher, Irving Norton. 1934a. Barber, William J. This fever analogy is essentially developed in. 37 Firstly, the idea that booms are responsible for the following depressions is also formulated in terms of “unhealthy” milieu, medically implying a causal link in terms of viral transmission of slumps. I. Irving Fisher and the Quantity Theory Let me then start briefly to set the stage with the initial position, the quantity theory of money as developed primarily by Irving Fisher who is to my mind by far the greatest American economist. 18 I. 1955. BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank. Yet, much to my amazement, I have been credited with having a theory of the whole phenomena.7. Mathematical Method in the Social Sciences. Fisher made important contributions to utility theory and general equilibrium. William Barber published large extracts from it in the volume 13 of The Works of Irving Fisher (volume 13: A Crusader for Social Causes). Political Economy is the hygiene and pathology of the social system.” (Antoine-Augustin Cournot, Researches into the Mathematical Principles of the Theory of Wealth, 1838/1897, 16), “I feel most earnestly the truth of this idea: that social science is very immature and that it will be a long time before it reaches the ’therapeutic’ stage, that the efforts of philanthropists to treat of therapeutics too soon, both delays the solid progress of the humbler preliminary stages of the anatomy and physiology of society and is more likely to lead to evil than good...” (Irving Fisher, Letter to Will Elliot, 1895)1. Particular attention is given to the role of high debt ratios, high leverage ratios, and changes in the purchasing power of money in Fisher’s analysis, and to … In view of the Depression, he rejected equilibrium, and noted that in fact debts might not be paid, but instead defaulted on: It is as absurd to assume that, for any long period of time, the variables in the economic organization, or any part of them, will "stay put," in perfect equilibrium, as to assume that the Atlantic Ocean can ever be without a wave. Also published in Revue de l’Institut International de Statistique 1934(1): 48-65. 1920. This bad cold/pneumonia metaphor clearly constructs what Georges Canguilhem calls a scientific ideology: The simile of an aggravation from a debt disease to a dollar disease during booms is often repeated: Moreover, it is generalized into a global view of “economic science”: The message is clear: whereas a shift from disequilibrium to equilibrium is a simple matter of mechanical self-regulation of the system, a transition from pneumonia to bad cold necessarily implies a medical intervention—practicing “artificial respiration” instead of “leaving recovery to nature”—, as the transition from the debt disease back to the dollar disease involves a “proper therapy”—, Hence Fisher conclusion on the necessity of a monetary economic policy designed to “prevent” or “cure” these situations of depression: “Finally, I would emphasize the important corollary, of the debt-deflation theory, that great depressions are curable and preventable through reflation and stabilization.” (Fisher, 1933a, 350). 30 See Part Three. Dimand, Robert W. 1993. This is the theory put forward by … Irving Fisher and the 100 Percent Reserve Proposal. … It is well that we face these failures and that, when we fail, we confess it with due humility. The following day, he asserted “Stock prices are not too high and Wall Street will not experience anything in the nature of a crash.”. Mechanical identities, analogies or homologies in economics thus imply a shift from the objects, definitions, or theorems in physics to the objects, definitions, or theorems in mathematical economics. term debt-deﬂation was coined by Irving Fisher (1933), and refers to the way debt and deﬂation destabilise each other. Irving Fisher's Debt-Deflation Theory was so prescient vs what occurred 75 years later. French translation by J. Lallot and Dupont-Roc. 1925. The American Economic Review, SPP of the 28th Annual Meeting of the AEA, 6(1): 162-169. Other debt deflation theories do not assume that debts must be paid, noting the role that default, bankruptcy, and foreclosure play in modern economies. But, more important than that, it is a good time, during the current financial turmoil, to reconsider some of his theories again, in light of current events. But few if any economists predicted it, or, if so, they failed to make their predictions public. The Debt-Deflation Theory of Great Depressions. Also, both economists made the exact same distinction between economic disequilibriums with or without over-indebtedness. This book (THE DEBT-DEFLATION THEORY OF GREAT DEPRESSIONS) is Irving Fisher’s most important work. How Fisher's Separation Theorem Works . In the opening section of the article, Fisher first compares economic fluctuations—the “so-called cycle theory”—to a “disequilibrium” of the “economic system”: “Disequilibrium” would here refer to the distance between theoretical analysis and empirical observations, both being part of “economic theory”: “economic theory includes a study both of (a) such imaginary, ideal equilibrium—which may be stable or unstable—and (b) disequilibrium. During the rising market, this capital gain tax deterred many a holder of rising stocks from selling them and reinvesting the gains j for the holder knew that if he sold, he would be penalized by having a large share of his increased capital taken away from him by the Internal Revenue office. 50 Use features like bookmarks, note taking and highlighting while reading THE DEBT-DEFLATION THEORY OF … He chaired the Ad Interim Committee of the American eugenics movement, created in 1915, at the second International Eugenics Congress. His Debt-Deflation Theory of Great Depressions (1933) was powerful and resonant, although largely neglected by officialdom, Wall Street and academia alike. He was one of the earliest American neoclassical economists, though his later work on debt deflation has been embraced by the Post-Keynesian school. James Tobin cited Fisher as instrumental in his theory of economic instability. Therefore, the workings of the demonstration lead Fisher to a description of the propagation mechanisms in terms of virus, infection, or immunity: [W]ith the exception of 1931-32, it seems that the depression has been, in each country, chiefly ruled by its changes of price level. In the Keynesian tradition, some suggest that the fall in aggregate demand caused by falling private debt can be compensated for, at least temporarily, by growth in public debt – "swap private debt for government debt", or more evocatively, a government credit bubble replacing the private credit bubble. A categorical method of debt relief is inflation, which reduces the real debt burden, as debts are generally nominally denominated: if wages and prices double, but debts remain the same, the debt level drops in half. Although he damaged his reputation by insisting recovery was imminent throughout the Great Depression, Fisher attempted to answer the same question we are asking today -- what really happened? He claimed that he foresaw no crash in the stock market. “It is characteristic only of narrow minds to decry medical science because physiological phenomena cannot be calculated as accurately as the planetary movements. Le normal et le pathologique. History of Political Economy, 9(4): 560-587. Hoarding and slowing down still more the velocity of circulation. Irving Fisher used it to answer the fundamental cause in the nature of the Great Depression. Fisher tuned his talents to monetary theory because he suspected that economic instability was largely the fault of existing monetary institutions. Like “a mere pendulum reaction,” a state of disequilibrium can mechanically turn back to a state of normal equilibrium, whereas a pathological state of disease implies some forms of “human effort” to turn back to a state of normality. The chief interrelations between the nine chief factors may be derived deductively, assuming, to start with, that general economic equilibrium is disturbed by only the one factor of over-indebtedness, and, in particular, assuming that there is no other influence, whether accidental or designed, tending to affect the price level. It can be found in the first edition of his Elementary Principles of Economics, in the passages on the little economic ambition of the “negroes from Philippines.” Or, in the mentions of The Theory of Interest, according to what “[i]n the case of primitive races, children, and other uninstructed groups in society, the future is seldom considered in its true proportions.” Or that the “communities and people” from “India, Java, the negro communities both North and South, the peasant communities of Russia, and the North and South American Indians” would all be “noted for lack of foresight and for negligence with respect to the future.” (see Cot, 2005), 38 Like the canonical metaphor of the reservoir of circulation for currency, “The water in a bath-tub is kept constant when the outflow through the waste-pipe exactly equals the inflow through the supply-pipe; but the slightest turn of the spigot from this equilibrium point will, in time, fill or empty the tub. A credit crunch lowers investment and consumption, which leads to declining aggregate demand, which additionally contributes to the deflationary spiral.. The interest rate acts like the spigot, to fill or empty the country's reservoir of circulating deposit currency.” (Fisher, 1932b, 127), 25 “A DEPRESSION is a condition in which business becomes unprofitable. The Debt-Deflation Theory of Great Depressions. And since we have found that these changes differ with different monetary standards, it ought naturally to follow that the, Fifthly, at last, when he analyses the causes of economic diseases, Fisher does not only review institutional elements. 1995. URL : http://journals.openedition.org/oeconomia/193; DOI: https://doi.org/10.4000/oeconomia.193. According to the debt deflation theory, a sequence of effects of the debt bubble bursting occurs: 1. 1985. Thirdly, both diagnosis and remedies are classified in two categories: “palliative” diagnosis and “palliative” remedies—also called “first aid” cures and remedies—; Palliative remedies refer to types of economic policies which are related to other interpretations of economic fluctuations than Fisher’s: they are described as “substantive cures,” whose “importance is secondary. Debt deflation is a theory based on the principle of the correlation between the debt burden and the price level in a country. Debt deflation is a theory that recessions and depressions are due to the overall level of debt rising in real value because of deflation, causing people to default on their consumer loans and mortgages. London: Routledge. 2nd printing with additions and corrections, Ronéo. Voir la notice dans le catalogue OpenEdition, Plan du site – Crédits – Contact – Informations légales – Flux de syndication, Nous adhérons à OpenEdition Journals – Édité avec Lodel – Accès réservé, Vous allez être redirigé vers OpenEdition Search, Business cycles, money and economic policy, Business Cycles, Money and Economic Policy, The Debt-Deflation Theory of Great Depressions: On Irving Fisher’s Use of Medical Metaphors, Métaphores médicales et théories des crises: « La théorie des grandes dépressions par la dette et la déflation » de Irving Fisher. Irving Fisher’s Debt-Deflation Theory of Great Depressions. New York, NY: Macmillan. The 1929 Stock Market: Irving Fisher Was Right. But the most important, and certainly the most time-consuming, related to Fisher’s strong involvement into the American eugenics movement. , 2010. 51Medical analogies are not the only analogies referred to in the corpus devoted to the debt-deflation theory of depressions38. Download it once and read it on your Kindle device, PC, phones or tablets. Cot, Annie L. 1989. ... please drop me an email so that I can share it with readers. Fisher, Irving. Fisher, Irving. Ricœur, Paul. Corporate profits rose, and the price level in the stock market rose. ... Only in imagination can all of these variables remain constant and be kept in equilibrium by the balanced forces of human desires, as manifested through ‘supply and demand’. Pathologists are now discovering that a pair of diseases are sometimes worse than either or than the mere sum of both, so to speak. a proper economic policy—from the part of the economic profession. That is the dollar disease. Klamer, Arjo and Thomas C. Leonard. 32 “[P]lease note the paradox. Annie L. Cot, « The Debt-Deflation Theory of Great Depressions: On Irving Fisher’s Use of Medical Metaphors », Œconomia [En ligne], 3-2 | 2013, mis en ligne le 30 janvier 2014, consulté le 02 décembre 2020. Dividend returns on stocks are moving higher. 1968. In general, this theory is not so much of a “cause,” as it is a description of the events of his time. Centre d’économie de la Sorbonne (CES), University Paris 1 – Panthéon-Sorbonne. Besomi, Daniele. Boston, MA: Houghton Mifflin. ... Then there were the tremendous intergovernmental debts, the reparation debts, and the tremendous internal Government debts. 10, 35). This “creed” consists in 49 articles “purposely expressed dogmatically and without proof.” (ibid. Barber, William J. Paris: Éditions du Seuil. 1, 8). 1932b. New York, NY: Zone Books, 1991. 10, 32), 33 This section is reproduced in Dimand, 2003, 75-77, emphasis added. 1994. This artefactual similarity strongly sustains Fisher’s call for a new institutional design in the treatment of economic crises—a design involving both a new set of theoretical analysis of booms and depressions, where disequilibria are neither the sole consequence of an exogenous shock, nor the result of a strictly endogenous process, and a new set of monetary therapies to the “dollar disease” and the “debt disease.”. The former is economic statics; the latter, economic dynamics. Ultimately, of course, but only after almost universal bankruptcy, the indebtedness must cease to grow greater and begin to grow less. Enrique Mendoza 12 February 2009 This column rehabilitates Irving Fisher’s debt-deflation theory to explain the current crisis. This first duo (statics and dynamics) is thereafter combined with another pair, composed of economic history and economic science: The study of dis-equilibrium may proceed in either of two ways. Conversely, a price increase leads to an increase in the debt burden. The Great Crash: 1929. New York, NY: MacMillan. % Fisher, Irving. Annie L. Cot, « The Debt-Deflation Theory of Great Depressions: On Irving Fisher’s Use of Medical Metaphors », Œconomia, 3-2 | 2013, 263-286. Fisher, Irving. Structural analogies (such as the distinction between “palliative remedies” and “preventive remedies”) imply a transfer from the technology and designs of medical treatments to the technology and designs of economic policies. In both cases, these analogies do not simply refer to some form of doxa: they appear as carefully designed with the purpose of producing both a new set of analytical propositions on the theory of depressions and a new set of economic policies. THE DEBT-DEFLATION THEORY OF GREAT DEPRESSIONS (Illustrated) eBook: Irving Fisher: Amazon.ca: Kindle Store ), 41 These efficient remedies should consequently be used as “preventive remedies:” in other terms, economists should concentrate on “prevention” through monetary policy. I confess it. Fisher, Irving. Besomi, Daniele. 30 THE DEBT-DEFLATION THEORY OF GREAT DEPRESSIONS BY IRVING FISHER INTRODUCTORY IN Booms and Depressions, I have developed, theoretically and statistically, what may be called a debt-deflation theory of great depressions. 29 “Those who imagine that Roosevelt's avowed reflation is not the cause of our recovery…are very much mistaken. The numerous writings Fisher devoted to this “crusade” largely inform about the strength of the medical reference for him, both regarding this often forgotten part of his theoretical work and regarding his methodological convictions. This contraction of deposits and of their velocity, precipitated by distress selling, causes, A fall in the level of prices, in other words, a swelling of the dollar. o 1933. Then comes recovery and a tendency for a new boom-depression sequence. 9 Although the full text of this address was not published, the New York Times published extracts in its edition dated January 2, 1932, under the following title: Irving Fisher, “First Principles on Booms and Depressions,” Address to the American Association for the Advancement of Science, January, 1, 1932 (reproduced in Fisher, 1997, vol. The basic notion that managers of a firm and its shareholders have different objectives is the starting point for Fisher's Separation Theorem… (Fisher, 1933a, 344), 29The metaphor also concerns the precise workings of the aggravation: as in medical diseases, the process of deterioration from cold to pneumonia could reverse the causality between the symptoms of the former and the symptoms of the latter, or even between the propagation mechanisms from the former (the cold, or the debt disease) to the latter (the pneumonia, or the dollar disease) and from the latter to the former: “True, the debt disease is often the precipitator of the dollar disease but, under the operation of the vicious spiral, the debt disease soon becomes the effect, and the dollar disease, the cause.” (Fisher, 1932b, 121), 30 Possible “therapies” would thence imply a choice between “leaving recovery to nature” or “artificial respiration”—and Fisher clearly advocates in favour of the latter.29 “In summary, we find that...the ways out are either via laissez faire (bankruptcy) or scientific medication (reflation)” (ibid., 349). Fisher, Irving. 20 See this extract from his 1946 “Address on the Irving Fisher Foundation”: “I entered economic from the standpoint of the mathematical sciences … It was, I believe, largely through my work and influence that the use of mathematics was introduced and developed in economics.” (Fisher, 1946, 23) – a position which largely undervalued the contributions of Cournot, Walras, Edgeworth or Pareto. 1932a. 55 Epistemic analogies have still another function.  She described how a process of balance sheet deleveraging ensued while consumers cut back on their spending to be able to service their debt. Le gène et l’intérêt: l’anamorphose d’Irving Fisher. Statistics in the Service of Economics. For his dissertation, published in 1892, Fisher constructed a remarkable machine equipped with pumps, wheels, levers and pipes in order to illustrate his price theory [see pictures of his draft and his first and second prototypes]. On January 1, 1932, he lectured on the same subject at the American Association for the Advancement of Science conference in New Orleans.9 In April 1932, Fisher presented his ideas on the “debt disease” and the “dollar disease” to the House of Representatives Committee on Ways and Means.10 In October 1933, he presented a paper entitled “The Debt-Deflation Theory of Great Depressions” at the 21st session of the International Statistical Institute meeting in Mexico City.11 The paper was published in the first volume of Econometrica as Fisher’s presidential address to the Econometric Society.12 One year later, in 1934, Fisher lectured on the international transmission of booms and depressions at the twenty-second session of the International Statistical Institute in London.13 Privately printed by Fisher in a revised version, under the title “Are Booms and Depressions Transmitted Internationally Through Monetary Standards?” (Fisher, 1934b), the paper was later published in the Bulletin de l’Institut International de Statistique (Fisher, 1934b). Each helps the other. Quarterly Publications of the American Statistical Association New Series, 18: 1024-1028. 57 The other normative implication concerns the role of ignorance and inexperience in the launching of the processes linking booms to depressions—and these themes directly refer to Fisher’s implication in the American eugenic movement, the aim of which was to get rid of these “dysgenic” elements whose ignorance—or, here, whose feverish speculative episodes—lead the whole nation to a succession of booms and depressions, and thus of social, economic and, ultimately, a set of non metaphorical medical diseases related to poverty. London: Pickering and Chatto, 14 volumes. In terms of foreign exchange, particularly of sovereign debt, inflation corresponds to currency devaluation. 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