Irving Fisher - Theories

The main theoretical work that Fisher is remembered for is the Fisher Equation of Exchange - particularly as this is the only thing he has named after him! Perhaps the best guide to the importance of an economist is how many things he has named after him! The equation of exchange is very important as it forms the basis for the classical and Monetarist theories of inflation. Fisher developed the equation simply as a mathematical identity, and Classical economists and Monetarists then made certain assumptions about it that enabled them to explain the cause of inflation.

The Fisher equation appears in various guises, but perhaps the most common is:

MV = PT

where:
M is the amount of money in circulation
V is the velocity of circulation of that money
P is the average price level and
T is the number of transactions taking place

This equation is in fact an identity as it will always be true. At its simplest level you could imagine an economy that has a money supply of £5. If this £5 is on average used 20 times in a year, it will have generated £100 of spending. In the Fisher equation above M would be equal to £5, V equal to 20 and PT would be £100. This £100 could be made up of, say 100 transactions of £1 each. PT can therefore be thought of as equivalent to National Expenditure.

Classical economists then tried to show that V and T would be stable in the long-term, thus implying that any increases in the money supply (M) would cause prices (P) to rise - i.e. inflation. For more details on this area of Classical theory try the main Classical economics section of the Virtual Economy.

Biography | Work | Theories