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The Great Depression: Mises vs. Fisher

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The Quarterly Journal of Austrian Economics

Abstract

Ludwig von Mises established the foundations of modern Austrian economics while Irving Fisher established the foundations of modern mainstream macroeconomics and central bank policy. Fisher helped create and was a proponent of mathematical economics, statistics and index numbers, and a monetary policy that “stabilized” the value of the dollar. Fisher claimed that his scientific approach established a new era of prosperity during the 1920s. Mises published a book in 1928 that critiqued Fisher’s approach and predicted that it would lead to an economic crisis and collapse. Before the stock market crash in 1929 Fisher proclaimed a perpetual prosperity for the economy and continued to recommend investing in stocks long after the market had collapsed. In this important case study, Mises passed the “market test” while Fisher lost his personal fortune during an economic crisis that his economics help create.

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Notes

  1. See Lavoie (1981) for a review of the debate. Also see Salerno (1990) and Rothbard (1991) for a more precise explanation of Mises’s contribution and the downfall of socialism.

  2. See Rothbard (2004) and Gertchev (2004) for more information on this subject. See also Hoover (2006) for a mainstream perspective on the microeconomics of macroeconomics. He declares that Mises’s extreme apriorism “provides the underlying vision of modern microeconomics”.

  3. For a more general coverage of who predicted the Great Depression see Skousen (1993).

  4. Tobin (1985, 1987) for example shows the wide-ranging impact of Fisher on modern economics.

  5. Tobin (1987, p. 370) shows that citations to Fisher’s work have been increasing relative to other important Progressive Era economists.

  6. On the connection between Fisher and Friedman (who declared Fisher “the greatest economist of the twentieth century”) see Rothbard (2002a).

  7. See Fisher (1925) where he attempts to empirically show that it is the instability of the purchasing power of the dollar that is the problem, not the business cycle per se. Mainstream economists also dismiss the idea of the business cycle and that it is really just “shocks” and “real factors” that cause changes in the economy. See for example Milton Friedman’s (1993) plucking model.

  8. Fisher’s (1976) paper was reprinted by the Journal of Political Economy in 1976.

  9. On the place of eugenics in economics see Leonard (2005a, 2005b, 2005c).

  10. For more on the impact of the tax cuts see Ekelund and Thornton (1986).

  11. See Parrish (1994) for a description of the important changes in the economy during this period.

  12. Rothbard (2002b, parts 3 & 4) shows how money and banking were changed, and why.

  13. Rothbard (1983). Interestingly, economist Steve Liesman described on CNBC (November 16, 2006) Rothbard’s explanation for the Great Depression when supposedly describing Milton Friedman’s contribution on the cause of the Great Depression.

  14. Friedman and Schwartz (1963, p. 197) show that the money stock increased under the Federal Reserve from less than $20 billion in 1914 to over $60 billion in 1929.

  15. For a further explanation of the Austrian business cycle theory and its application to the Great Depression see Rothbard (1963).

  16. See Thornton (2004a, 2004b, 2004c, 2004d, 2006) for a recap of how well economists predicted these important economic events.

  17. For an in-depth analysis of the role of realism and abstraction in economics that contrasts the methods of Mises and Friedman see Long (2006).

  18. In addition to providing the theoretical building blocks for creating business cycles, Fisher (1956, p. 230; biography by his son, Irving N.) reported that in a conversation with Mussolini that “I am spending $15,000 to $20,000 a year on propaganda for stable money.” The chapters in this biography on business cycles and fighting the depression are particularly revealing, not of economic insight, but in how badly Fisher had failed, as a blind man sifting unfamiliar evidence for a cure for his blindness.

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Authors and Affiliations

  1. Ludwig von Mises Institute, Auburn, AL, USA

    Mark Thornton

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  1. Mark Thornton
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Correspondence to Mark Thornton.

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Mark Thornton (mthornton@prodigy.net) is Senior Fellow at the Ludwig von Mises Institute. I would like to thank Stephen Carson and Paul Wicks for useful comments and suggestions.

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Thornton, M. The Great Depression: Mises vs. Fisher. Quart J Austrian Econ 11, 230–241 (2008). https://doi.org/10.1007/s12113-008-9046-2

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