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Fisher’s View on Capital and Interest Essay

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Updated: Jul 10th, 2021


One of the main aspects of the American economy’s functioning is that, ever since the 1930s, it never ceased being subject to large-scale monetarist interventions, on the government’s part. After all, deploying financial means to revitalize the economy indeed does make much logical sense, especially when policymakers are equally concerned with trying to address both inflation and deflation. Nevertheless, as practice indicates, the adoption of the monetarist approach to managing the economy has often proven rather ineffective, if not to say strongly detrimental to the society’s overall well-being. In the author’s opinion, this has to do with the fact that, even though the monetarist conceptualization of the economy does take into account the systemic subtleties of how the interest rate is being formed, it regards the process to be essentially mechanistic.

The writings of Irving Fisher (1867-1947) are particularly illustrative in this respect. Being considered one of the founders of the neoclassical school of economics, Fisher did contribute rather substantially towards promoting a holistic outlook on the significance of the capital, as the “fuel of economy”, as well as on the role of financial leveraging in defining the fluctuations of supply and demand in the market. At the same time, however, there are many indications that Fisher’s conceptualization of the “free-market” economy and its driving forces cannot be regarded as representing an undisputed truth value. This explains why the modern criticism of monetarism is primarily concerned with exposing the presumed inconsistency of many of Fisher’s economic provisions. Therefore, it is indeed thoroughly appropriate to refer to Irving Fisher as an “economic visionary” who has failed at grasping the discursive significance of many of his own analytical insights into the subject matter. Throughout the paper’s following sub-chapters, the author will explore the validity of this suggestion at length while outlining the theoretical and practical implications of Fisher’s view on the capital/interest rate (as seen in his 1896 article What is Capital?) and assessing the measure of their cause-effect soundness.

Analytical Review

Even though the scope of subjects, discussed by Fisher in his article is rather extensive, it is still possible to outline the most notable of them and define the foremost structural subtleties of the deployed line of argumentation, on the author’s part. The article begins with Fisher bringing readers’ attention to the fact that there is no universally recognizable definition as to what the notion of the capital stands for. At the same time, however, it did not escape the author’s attention that there is a common quality to just about every of such definitions: the fact that those who come up with them tend to treat the concerned notion as being inseparably interconnected with the notion of wealth. As Fisher noted: “Now we find, beginning with Adam Smith, that every definition of capital has been erected on the unquestioned assumption that the problem was one in the classification of wealth” (513).

According to the author, however, the main ontological fallacy of how economists before him used to expound on the subject of the capital is that it did not occur to them that there is a spatial quality to the former, concerned with its state of being at a particular point of time (stock) and the continually transforming qualitative aspects of the capital as such that represents the value of a thing-in-itself (flow). In Fisher’s opinion, this undermines the casuistic soundness of the classical definitions of capital as the driving force of the economy. The author has gone to a great length exemplifying his suggestion with respect to Adam Smith’s insistence that the term “capital” is primarily reflective of one’s possession of tangible economic assets. According to Fisher, however, such a conceptualization of the capital does not take into consideration what can be deemed as its “spatial fluidity”: the capital’s quality that came to the attention of economists during the late 19th century.

The author further argues that capital’s “flow” is itself a compositional notion, in the sense of referring to both the duration and rate as its integral elements. Moreover, Fisher insists that it is specifically the former that contributes the most towards defining the overall competitiveness of a particular economic activity: “The rate of a flow is of greater significance in most economic problems than either the duration of the flow or its total magnitude” (514). This, of course, implies that the purchasing power of money is a systemic term, as well as that it is specifically the contextual aspects of a particular commercial activity that define its nature more than anything. Furthermore, such an insistence, on the author’s part, implies that it is no longer appropriate to consider the capital and the actual rate with which it is being replenished as the two closely related but ontologically incompatible categories. Fisher exemplifies the concerned fallacy in an allegorical manner: “Just as the ancients regarded solids, liquids, and gases as different kinds of matter (earth, water, air) instead of different states, so economists have thought of capital and income as different kinds of commodities, instead of different aspects of the commodity in time” (516). The author’s suggestion, in this regard, serving as the axiomatic premise from which his understanding of the capital and interest actually derives.

As one can infer from the article, Fisher used to view the capital in terms of a “stock” that facilitates the growth of the economy’s service sector and enables the generation of financial income on a continual basis (“flow”). This implies that there is a strongly defined longitudinal dimension to the capital’s value and that the latter never ceases to fluctuate as time goes on. Moreover, this also implies that the assessment of the capital’s objective value must be concerned with measuring the full scope of potential benefits of putting it in practical use, regardless of whether the investor decides to proceed with the move or not. Consequently, this suggests that capital is best seen as the discounted flow of income. As the author pointed out: “We cannot think of capital in one case as being perpetually paid and in the other as absolutely idle. It is merely a question of the rate of payment” (Fisher 525). This, of course, suggests that the spatially rigid definitions of capital do not apply: “There is no one rigid definition which is universally available. Something must be left for an explanation by the context (Fisher 525).

Probably the main discursive implication of what has been mentioned earlier, with respect to Fisher’s view on the capital, is that unlike what it used to be the case with most of his contemporaries, the economist tended to perceive the concerned notion in societal (rather than purely transactional) terms. This, in turn, helps to explain Fisher’s take on the rate of interest and its role in ensuring the sustainability of the “free-market” economy. According to the author, the notion of interest is ontologically ambivalent. On the one hand, interest is the expression of the capital’s utility, i.e. the ability to generate income. On the other hand, however, interest can also be seen as the actual compensation for the cost of waiting until the invested funds begin to generate income. The functioning of the capital market is defined by the perpetual clash between the utility and the costs (Fisher Ch. V).

Consumers enter this market with their savings, for which they expect to receive a premium in the form of interest. Manufacturers enter the same market in the search of funds that can be borrowed while willing to pay interest. Hence, the definition of the interest rate: is the fluctuating ratio between supply and demand in the financial market. As Fisher himself defined it: “When a stock of goods or capital is exchanged for a perpetual flow of goods or income, the ratio of exchange constitutes the rate of interest” (515). The above-stated has two important implications. First, the capital cannot be discussed in any other way but in close conjunction with what accounts for the actual forces that take part in forming the rate of interest. Second, it makes much more sense perceiving the capital as a “process” rather than merely a “state of being”: “True capital is like the fall; it is an abiding element, owing its continuance to the constant wasting and replenishing of its substance” (Fisher 529).

Being one of Fisher’s earliest works, What is Capital? laid a foundation for the development of many ideas that the economist ended up promoting through the latter phases of his life. In this regard, one must mention Fisher’s insistence that there is a positive correlation between the total amount of money in circulation and commodity prices, and that psychological factors play only a minor role in defining the market dynamics. In its turn, this idea legitimized a call for working out what later became to be known as Fisher’s “equation of exchange” (MV=PT): a mathematical instrument for calculating the amount of money needed to ensure the healthy flow of economic transactions in a particular market within the specified period of time (Tavlas 212). The equation’s independent variables are the amount of money (M) and the speed (or velocity) of their circulation (V), with its dependent variables being the amount of exchanged goods (T) and the prices of these goods (P). During the early 20th century, the formulation of this equation, on Fisher’s part, predetermined the establishment of the neoclassical school of economics, which places a heavy emphasis on financial transactions/monetary emissions as the key to ensuring a steady pace of economic progress.

Strengths and Weaknesses: Discussion

Following the end of WW2, it became a commonplace practice among economists to claim that Fisher did contribute rather substantially towards deepening our understanding of what economics is all about.

One of his greatest contributions, in this regard, is that Fisher exposed the existence of a systemic link between the type of fiscal policy, pursued by the government, and the overall economic climate in the country. This simply could not be otherwise: the economist’s insights into the formation of the interest rate presuppose that in the realm of economic affairs, the former is nothing short of being an entity of its own: “The internal rate of return depends upon present and future prices; present prices reflect future use values through the market place’s discounting process, which depends upon the rate of interest” (Alchian 942). The validity of Fisher’s outlook on the significance of the rate of interest can be illustrated with respect to the initial success of many monetarist interventions in the West that aimed to keep the interest rate low. After all, the intentionally lowered rate of interest results in increasing the utility of financial loans provided by the banks. This, in turn, results in providing an additional incentive for investors to consider affiliating themselves with the long-term projects, the abundance of which has traditionally been considered the most important facilitator of economic growth. Therefore, it is indeed explainable why along with being referred to as an important figure within the neoclassical school of economics, Fisher is often credited with conceptualizing the man principles of monetarism: “His (Fisher’s) fundamental premise and basis for all other analysis and policy prescription was this: money matters and matters most. He was indeed, the first of the modern ‘monetarists’” (Allen 563).

Fisher is also credited with having established a methodological framework for the deployment of statistical analysis in economics, as well as for the utilization of the latter for guiding the sociopolitical discourse in this country. As Cook noted: “It was Fisher… who formalized, legitimized, and popularized the use of price statistics in progressive political discourse” (247). In particular, Fisher succeeded in convincing the general public that the assessment of economic policy, on the government’s part, must be primarily concerned with measuring the costs of its implementation.

The economist’s suggestion that there are two qualitative dimensions to the formation of the rate of interest (the marginal rate of “impatience” and the expected rate of return), also contributed rather substantially towards the eventual legitimation of the idea that the concepts of “free market” and “welfare state” are not quite as incompatible as they may seem at an initial glance. The reason for this is apparent: even such early of his works as What is Capital? contain a number of clues as to the fact that it would be wrong to apply a linear/positivist approach for determining the value of a particular product or service: “Fisher emphasized that… the discounted present value of the stream of income from human skills and abilities far exceeds the value of physical capital” (Demand and Geanakoplos 6). The ongoing rise of “post-industrial” economies across the world testifies to the validity of Fisher’s point of view.

At the same time, Fisher’s approach to managing economic affairs, in general, and his theorization of the capital/interest, in particular, has been criticized on account of representing very little practical value. There are a number of reasons to think that this suggestion is not altogether deprived of a rationale. Probably the main weakness of the economist’s line of reasoning, with respect to what kind of forces play a role in establishing the objective value of the capital, is that it lacks axiomatic integrity. For example, according to Fisher, income is generated by the continual flow of interexchange services that take place within the economy’s real sector. Nevertheless, the author never specified the actual criteria for defining the notion in question. In this regard, Chambers came up with the insightful observation: “Fisher does not say what constitutes ‘services’ in a manner that is free of ambiguity” (141). This, of course, could not result in anything else but in undermining the overall logical soundness of many of Fisher’s suppositions. What adds to the problem even further is the fact Fisher always tended to idealize the role of “free market” in bringing to life a particular service, as well as informing one’s consumerist stance. There, however, can be very little doubt about the conceptually erroneous nature of such his tendency.

After all, as Chambers pointed out in the same article: “Some services do not pass to the consumer by way of a market. The shelter given by a man’s own house is a service of wealth, but no money measure of it is registered” (Chambers 142). Evidently enough, Fisher was driven to downplay the role of what he used to refer to as “intangible assets” in defining one’s perception of what accounts for the “marginal utility” of a particular product or service: “Immaterial wealth… is excluded from ‘capital’ in Mr. Fisher’s analysis. Indeed, the existence of intangible assets is denied” (Veblen 116). The most likely motivation behind Fisher’s tendency to overemphasize consumerist instincts in people, as the driving force of societal and economic progress, is that he wanted to exclude as many of the principally unidentifiable mechanics in establishing the “marginal utility” of the capital, as possible. This, in turn, was supposed to increase the practical workability of Fisher’s theory, as the instrument of predicting economic downturns before they take place. The resulting effect, however, could not have proven further from the desired one. The reason for this is that the economist’s chosen approach to accomplishing such an objective could be referred to as anything but thoroughly systemic, in the sense that it does not take into account the whole range of motivational factors that prompt individuals to become agents of economic relations (Fongemie 624).

The validity of this particular suggestion can be shown regarding the fact that, as one can infer from What is Capital? and the economist’s other works, the very process of how people indulge in the economic cause-effect reasoning is absolutely rational: “Instantaneously balancing the money cost of sugar with its utilitarian benefit to her family, the housewife fills her shopping cart until equilibrium has been reached between the market price and her own marginal utility” (Cook 250). As the practice indicates, however, this could not possibly be the case because the concerned process is invariably affected by a number of psychological factors, reflective of the deep-seated irrational anxieties in people. What this means is that one’s seemingly rational decision-making, within the context of how he or she addresses a particular economic challenge, is fundamentally unpredictable. To complicate the issue even further, Fisher’s paradigm of “marginal utility” presupposes that there is very little objectivity to how the capital is being endowed with the factual worth, as the catalysis of economic relations. As a result, the economist’s model of such relations never leaves the domain of pure theory, and as we are aware, whatever is good in theory does not necessarily have what it takes to prove practically effective.

The described weakness of Fisher’s view on capital/interest appears to derive from yet another conceptual fallacy of his economic model: the fact that it downplays the role of people’s affiliation with a particular social class in prompting them to rationalize their economic choices in one way or another. As Velupillai argued: “In Fisher’s view… there is no notion of social relations or class or power or culture. There are only homogenous and autonomous individuals floating around ahistorical space voluntarily reaching contractual and mutually beneficial agreements” (559). What is Capital? is perfectly illustrative, in this regard. After all, in it, the author deliberately strived to present the accumulation of capital as something that has very little effect on how individuals tend to perceive the process’s societal significance.

In fact, the article’s very conclusion implies that this process takes place in the essentially “classless” economic environment: “Just as the population is correlative to the various rates of births, deaths, marriages… so capital is correlative to income, expenditure, production, consumption ‘ ripening’ of goods in process of production, exports, imports, monetary circulation, etc.” (Fisher 534). Such a point of view, however, can hardly be deemed even slightly plausible. After all, it was specifically the rise of “class consciousness” in people throughout the 20th century that predetermined many of the economic climate’s contemporary specifics. Apparently, it never occurred to Fisher that, contrary to the postulates of the neoclassical paradigm in economics, people’s perception of the surrounding economic environment and consequently their role as economic agents, cannot be discussed outside of the concerned individuals’ place on the social hierarchy ladder. The most logical explanation behind the outlined inconsistency is that Fisher himself acted on behalf of the country’s ruling elite: hence, the “socially neutral” subtleties of his conceptualization of both the capital and the rate of interest.

Fisher’s Legacy: Discursive Inconsistencies

As it was mentioned earlier, Fisher is now considered to have been one of the earliest advocates of monetarism, which in turn implies that he can also be referred to as the precursor of economic liberalism, in the contemporary sense of this word. Therefore, it will be appropriate to assess Fisher’s theoretical legacy in conjunction with the apparent pitfalls of economic liberalism as well. After all, the author did contribute a great deal to promoting the idea that the functioning of just about any economic system is essentially self-regulative.

Once evaluated from the suggested perspective, Fisher’s conceptualizations of capital and interest will appear to be even more discursively erroneous. For example, the economist’s concept of “marginal utility” is reflective of the assumption that the “velocity” of money’s circulation is relatively constant over time, and that the gross national product corresponds to the level of “full employment” within the society. Consequently, this implies that there is a “neutral” quality to the value of money (the main theoretical premise of monetarism) and that by increasing or decreasing the amount of money in circulation, policymakers are able to ensure the overall sustainability of the economy’s functioning (Meacci 419). Such a point of view presupposes that inflation is quintessentially a monetary phenomenon and that it affects all sectors of the economy in a uniform and proportionate manner.

Nevertheless, being clearly “macroeconomic”, the monetarist approach to managing the economy does not take into consideration the microeconomic effects of enacting a particular “capital-friendly” fiscal policy by the government. That is, it only draws attention to the effect of a change in the quantity of money on the general price level, and not on the actual structure of relative prices. As a result, this approach tends to ignore the most harmful consequences of inflation: the fact that it reduces the bargaining power of economic agents and provides a powerful impetus to the rise of unemployment.

What is even worse, Fisher’s neoclassical model turns a blind eye on the the fact that, whereas just about any society consists of individuals that are primarily driven by the considerations of self-interest, the actual logic of the interrelationship between these people as the fully integrated society-members, most certainly does not adhere to the same paradigmatic assumption. The reason for this is that the process of a particular system (such as human society) becoming progressively more complex, results in the emergence of the qualitatively new patterns of this system’s functioning. These patterns, however, do not directly derive from what used to be the same system’s operative principles, before it has reached a new level of complexity. What this means is that, contrary to how Fisher used to see it, there is nothing constant to the way in which people perceive the de facto worth of a particular product/service, as well as to what they regard to be the measure of its “marginal utility”.

The application of the analytical inquiry into Fisher’s conceptualization of how wealth is being generated will reveal that it lacks systemic wholesomeness as well. After all, even though in What is Capital? the author has gone to a great length discussing the spatial aspects of the process, he nevertheless preferred to refer to it in terms of a strictly economic phenomenon. Moreover, according to him, it is specifically the accumulation of the capital the enables economic progress and not vice versa: “The total capital in a community at any particular instant consists of all commodities of whatever sort and condition in existence… and is antithetical to the streams of production, consumption and exchange of these very same commodities” (Fisher 514).

There is, however, a good reason to believe that the accumulation of wealth is, in fact, a social phenomenon. The reason for this is that it is namely the continual generation of “surplus value” that increases the volume of commercial transactions within the society, which in turn makes it possible for investors to benefit from being in the possession of the capital. And as contemporary economists are being aware, the stronger is the “division of labor” within a particular economic system, the higher is the amount of “surplus value”, generated by this system. What this means is that the very process of the society growing ever more complex, in the structural sense of this word, is itself the source of wealth. By increasing the extent of its structural complexity, the society is able to reduce the amount of energetic entropy within, which in turn makes it much more operationally efficient: hence, enabling investors to increase their returns. This raises additional concerns about the legitimacy of monetarism/neoliberalism, in general, and Fisher’s neoclassical theory of the capital, in particular.


In light of the earlier acquired analytical insights into the discussed topic, it will be appropriate to confirm the validity of the paper’s initial thesis. Apparently, Irving Fisher indeed deserves to be given much credit for having exposed the mechanical intricacies behind the interest rate’s formation. He also succeeded in incorporating the dimension of time into the methodological framework of economic analysis and explaining the function of the statistical data in economic equations. At the same time, however, there is very little reason to regard the economist’s legacy much too high, especially given the recent failures of monetarism/neoliberalism in addressing the 21st century’s economic and social challenges.

Because of what was mentioned earlier, it is specifically Fisher’s belief in the mathematical predictability of one’s rational agency in the economic settings that appear to have contributed the most towards undermining the overall plausibility of his model of the capital/interest. Even though it is indeed possible to rip people out of the social context and turn them into merely an element of the cost-benefit equation, the latter will have very little practical value as the tool of economic analysis. There are many indications that, following the outbreak of the Great Depression, Fisher came to realize this simple fact. This, however, did not have much of an effect on the strength of the economist’s adherence to the principles of neoclassical liberalism in economics. One can see it as yet additional proof that, just as many of Fisher’s critics used to suggest, he did suffer from the lack of intellectual flexibility. In its turn, this made it a rather impossible task for the economist to be able to see beyond the structurally rigid framework of his own model of economics. Nevertheless, some of Fisher’s insights into what should be considered the actual significance of the interest rate’s fluctuations remain thoroughly viable even today. This once again testifies to the soundness of the paper’s original thesis.

Works Cited

Alchian, Armen. “The Rate of Interest, Fisher’s Rate of Return Over Costs and Keynes’ Internal Rate of Return.” American Economic Review, vol. 45, no. 5, 1955, pp. 938-942.

Allen, William. “Irving Fisher, F. D. R., and the Great Depression.” History of Political Economy, vol. 9, no. 4, 1977, pp. 560-587.

Chambers, R. J. “Income and Capital: Fisher’s Legacy.” Journal of Accounting Research, vol. 9, no. 1, 1971, pp. 137-149.

Cook, Eli. “The Neoclassical Club: Irving Fisher and the Progressive Origins of Neoliberalism.” The Journal of the Gilded Age and Progressive Era, vol. 15, no. 3, 2016, pp. 246-262.

Dimand, Robert, and John Geanakoplos. “Celebrating Irving Fisher: The Legacy of a Great Economist.” The American Journal of Economics and Sociology, vol. 64, no. 1, 2005, pp. 3-18.

Fisher, Irving. “What Is Capital?” The Economic Journal, vol. 6, no. 24, 1896, pp. 509–534.

Fisher, Irving. Principles of Economics, Ch. V, 1907.

Fongemie, Claude. “A Note on Fisher’s Equation and Keynes’s Liquidity Hypothesis.” Journal of Post Keynesian Economics, vol. 27, no. 4, 2005, pp. 621-632.

Meacci, Ferdinand. “Irving Fisher and the Classics on the Notion of Capital: Upheaval and Continuity in Economic Thought.” History of Political Economy, vol. 21, no. 3, 1989, pp. 409-424.

Tavlas, George. “Retrospectives: Was the Monetarist Tradition Invented?” The Journal of Economic Perspectives, vol. 12, no. 4, 1998, pp. 211-222.

Veblen, Thornstein. “Fisher’s Capital and Income.” Political Science Quarterly, vol. 23, no. 1, 1908, pp. 112–128.

Velupillai, Kumaraswamy. “Irving Fisher on a ‘Fundamental Theorem’ in Neo-Austrian Capital Theory.” Journal of Institutional and Theoretical Economics (JITE), vol. 151, no. 3, 1995, pp. 556-564.

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