Economic blind spot

4th March 2005 at 00:00
Baffled by economic theory? Hard pressed to explain the difference between iterative dominance and backward induction? Maybe you should try reading Irving Fisher.

The first graduate to receive an economics PhD from Yale, he has been described as the clearest writer on the subject who ever put pen to paper.

It has been said of Fisher that he had the intellect to use maths in nearly all his theories and the sense to introduce it only after he had clearly explained the matter in words. This may be why his book Theory Of Interest is still read by students 75 years after it rolled off the presses. Not that clarity was Fisher's only virtue, for his theories changed both the way that economists thought and, on occasion, the way that governments behaved. The Fisher Equation of Exchange formed the basis for the monetarist theory of inflation, while his ideas on the compiling of indices resulted in such familiar tools as the FTSE Index and the Retail Price Index.

Fisher was also an amateur astronomer, poet, peace campaigner (he proposed a league of nations years before the Treaty of Versailles) and an inventor.

He amassed a fortune from his rotary card file, better known today by the trademark name of Rolodex. He even wrote a best-selling guide entitled How To Live: Rules For Healthful Living Based On Modern Science. Hardly surprising, then, that when this intellectual giant prognosticated on the workings of the stock market, people took notice.

However, Fisher's reputation among investors as a veritable prophet came to an abrupt end on October 17, 1929, when he said: "Stock prices have reached what looks like a permanently high plateau". Just one week later, Wall Street crashed, triggering what was to be the greatest economic depression of modern times. While his reputation as a theorist continued until his death in 1947 (he advised Franklin D Roosevelt on monetary policy between 1932 and 1937), Fisher's days as the world's first celebrity economist were well and truly over.

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