Monday, May 22, 2017

Fisher's Theory of Interest #1

American economist Irving Fisher published The Theory of Interest in 1930. The subtitle is as Determined by Impatience to Spend Income and Opportunity to Invest It. These two factors sound very fitting to me for describing the nature of interest. He dedicated the book to the memory of John Rae and Eugen Böhm-Bawerk who laid the foundations upon which he endeavored to build.

The first chapter is a summary of his The Nature of Capital and Income published in 1906. He regarded income as the central idea of his economics. Enjoyment income, real income, and the cost of living are three different stages of income. They run in parallel but are not synchronous in time. Enjoyment income is psychological and can't be measured directly. It can be approximated indirectly by real income. Real income consists of those final physical events in the outer world which give us our inner enjoyments.  Real income includes having shelter, the use of clothes, the eating of food, reading, entertainment, and all those other events that contribute to enjoyment.

Like approximating an individual's enjoyment income by real income, an individual's real income can be approximated by his cost of living, the money measure of real income. "The total cost of living, in the sense of money payments, is a negative item, being outgo rather than income; but it is our best practical measure of the positive items of real income for which these payments are made" (The Theory of Interest, p.7).


No comments:

Post a Comment