Monday, June 11, 2012

Now That's a Model!

I was at the Canadian Economics Association meetings in Calgary this weekend and I went to hear David Laidler speak on Irving Fisher. (Laidler's paper is here.)   The other speaker at the session, Robert Dimand, mentioned that Fisher's doctoral dissertation was an independent discovery of general equilibrium.   While he did a good job,  the effort wasn't necessary since Walras and Edgeworth had already figured it out.

Still, Fisher didn't just do the math, he also designed and built a "machine" to calculate equilibrium prices.

My first thought was--how can they make fun of hydraulic Keynesianism?     What about hydraulic microeconomics!

A photo  

A diagram.

Another diagram.

I must confess that some of my micro intuitions have a hydraulic feel--the composition of demand changes like a fluid being sucked out of one sector of the economy and flooding into another--according to the preferences of households and firms.   But I must admit in my vision of the market system, there is a lot of continuous sloshing about rather some kind of exact balancing of the water levels.

I think it is common knowledge that Fisher's reputation was destroyed by his prediction that stock prices would rise in 1929.   The American economy was heading upward and ever onward!

I didn't realize that he put prohibition on his list of reasons for the fundamental strength of the American economy.   

I had always thought that Fisher gave the Federal Reserve too much credit, expecting them to listen to the world's greatest monetary economist (him,) and prevent the collapse in the quantity of money, spending on output, and the price level.   Fisher was shocked and appalled that they continued to apply their "real bills" nostrums, worrying about speculation and "inflation" as they put the economy through a deflationary wringer.

Come to think of it, Fisher's faith that the public officials at the Fed would do the right thing is similar to his notion that a legal ban on alcohol would create a nation of productive teetotalers rather than the reality of a nightmare of organized crime.