Scarica Irvings Fisher's Debt-Deflation Theory of Great Depressions e più Slide in PDF di Mercato Finanziario solo su Docsity! THE DEBT-DEFLATION THEORY OF GREAT DEPRESSIONS BY IRVING FISHER THE DEBT-DEFLATION THEORY OF GREAT DEPRESSIONS The Great Depression was a watershed in economic theory. Keynes’ General Theory represented an effort to explain and counteract this unprecedented downturn in economic activity. Nevertheless, we are still far from having a complete explanation of this event. The stock market crash of October 1929 and its connection with the subsequent severe contraction of real output have also been the object of conflicting interpretations. Fisher, who is one of the leading American economist of the twentieth century, was also an acute observer of the complex and dramatic macroeconomic events of Great Depression and he was one of the most active in seeking a solution. For Fisher as for other economic scholars, the Depression was an unexpected event that demanded new answers in terms of economic policy. On the eve of the stock market crash in October 1929 Fisher predicted that the share prices were not overvalued and that their increase was due to new profit opportunities created by technological innovation and sharp rises in productivity (Pavanelli, 2003). As the depression worsened, however, he became convinced that new theoretical explanations were needed. He presented a new model (debt-deflation theory) based on the interaction of real and monetary aspects. In this lesson we will read the main steps of debt deflation theory. “CYCLE THEORY" IN GENERAL 3. The study of dis-equilibrium may proceed in either of two ways. We may take as our unit for study an actual historical case of great dis- equilibrium, such as, say, the panic of 1873; or we may take as our unit for study any constituent tendency, such as, say, deflation, and discover its general laws, relations to, and combinations with, other tendencies. The former study revolves around events, or facts; the latter, around tendencies. The former is primarily economic history; the latter is primarily economic science. Both sorts of studies are proper and important. Each helps the other. The panic of 1873 can only be understood in the light of the various tendencies involved—deflation and other; and deflation can only be understood in the light of the various historical manifestations—1873 and other. "CYCLE THEORY" IN GENERAL 9. We may tentatively assume that, ordinarily and within wide limits, all, or almost all, economic variables tend, in a general way, toward a stable equilibrium. In our classroom expositions of supply and demand curves, we very properly assume that if the price, say, of sugar is above the point at which supply and demand are equal, it tends to fall; and if below, to rise "CYCLE THEORY" IN GENERAL 11. But the exact equilibrium thus sought is seldom reached and never long maintained. New disturbances are, humanly speaking, sure to occur, so that, in actual fact, any variable is almost always above or below the ideal equilibrium. For example, coffee in Brazil may be over- produced, that is, may be more than it would have been if the producers had known in advance that it could not have been sold at a profit. Or there may be a shortage in the cotton crop. Or factory, or commercial inventories may be under or over the equilibrium point (continue…) "CYCLE THEORY" IN GENERAL “14. But, in practice, general over-production, as popularly imagined, has never, so far as I can discover, been a chief cause of great dis- equilibrium. The reason, or a reason, for the common notion of over- production is mistaking too little money for too much goods.” "CYCLE THEORY" IN GENERAL 15. While any deviation from equilibrium of any economic variable theoretically may, and doubtless in practice does, set up some sort of oscillations, the important question is: Which of them have been sufficiently great disturbers to afford any substantial explanation of the great booms and depressions of history? References Irwing Fisher , The Debt-Deflation Theory of Great Depressions in «Econometrica», OCT 1933, VOLUME 1, ISSUE 4. Giovanni Pavanelli (2003), The great depression in Irving Fisher’s work, in “History of Economic ideas”, vol. 11, no.1.
