Sismondi was an early 19th century economist who criticized some of the ideas of the classical economists like Smith and Ricardo. Some of Sismondi's main ideas included: 1) He believed the goal of economics should be increasing human happiness rather than just the production of wealth. 2) He argued that overproduction could occur due to issues like a lack of purchasing power among workers, which the classical economists did not acknowledge. 3) He saw a conflict of interest between the capitalist class and the working class, and believed this divide would continue to widen under the capitalist system. 4) Sismondi advocated for reforms like limiting working hours and establishing social insurance programs to address some

1. Sismondi
Economic Idea # 1. Aim and Method of Political Economy:
Sismondi accepted the theoretical principles of Adam Smith but strongly criticised the aim,
method and end of economics as put by classical economists.
The classical economists believed that political economy was the science of wealth or
chrematistics.
Sismondi felt that economics was not the science of wealth but its main object was man
or the physical well-being of man.
To classical economists, it is the increment of wealth which spells the well-being of the society
and its members.
But Sismondi points out that the object really is to increase happiness of the members of
the society. He advocated the way of increasing human happiness. He gave importance to
distribution more than the theory of production.
In advocating the historical method of study and rejecting the classical method of abstraction,
Sismondi was the forerunner of the Historical School. Sismondi can be considered as the first
economist to have started the battle of methods.
Economic Idea # 2. Overproduction:
The classical economic theory had established an automatic equilibrium between production
and demand. Over-production was considered by classical economists as indicative of general
prosperity.
But Sismondi believed it to be a great evil caused by maladjustment. He could not assume
automatic equilibrium as it was unrealistic. Sismondi did not believe in Say’s law of markets
or the deductive method of Ricardo in which there was no possibility of over-production.
According to Sismondi, over-production resulted when annual production was in excess of
annual revenue. He said that even if prices fell, production would continue. He condemned
over-production as it created unemployment, reduced the purchasing power of people, and
caused an acute distress.
Sismondi believed that over-production was mainly due to:
(1) The competitive character of the economy.

2. (2) Production is determined by the supply of capital and not by demand and the separation of
labour and ownership of means of production.
Competitive character of the economy brings in two types of maladjustment.
On the one hand, it brings about uncertainty regarding the demand and on the other entails lack
of mobility of factors of production. As the businessmen are unable to judge correctly the
market demand, production is based on the availability of capital. This accentuates the problem
of over-production.
Workers have weak bargaining power and therefore, they are forced to accept low wages. This
is the result of the divorce between labour and the ownership of means of production. Sismondi
thus describes the increasing concentration of wealth in fewer hands along with increasing
numbers of poor workers.
Economic Idea # 3. Class Conflict:
Through his theory of over-production and crisis, Sismondi was able to lay his finger on the
basic conflict of interest between different classes. Sismondi did not believe in harmony of
social interests. He was one of the early economists to speak the existence of two social classes,
the rich and the poor, the capitalists and the workers.
He thought the interests of these two classes were opposed to each other and they were in
constant conflict with one another. The workers are not able to share the fruits of increased
productivity. The profits go to the businessmen in the form of profits. Thus the gulf between
the rich and the poor keeps on widening. It may be pointed out that, “Marx’s idea that labour
alone created value, and that consequently profit and interest constituted a theft, is entirely
foreign to Sismondi.”
He believed that exploitation of labour meant that labour was getting less than its due. The
concentration of capital in the hands of a few persons ruined the small scale producers. The
society has been divided into two classes – the owners and the proletariate Property and labour
are separated.
Economic Idea # 4. Population:
Sismondi wanted population to be in such proportion to wealth as would ensure the
maximum human welfare. He never suggested a large population.

3. He believed that affection which created an urge for marriage, and egoism and calculation that
place a check on the growth of numbers were the two forces that determined the size of the
population by their interplay. He also pointed out that the labourers did not marry unless they
were employed with an assured earning.
Since the poor were exploited and their wages could not be fixed permanently, they do not
wait, get married and multiply beyond the natural limit.
Sismondi disapproved the Malthusian theory of Population. He criticised the arithmetical
and geometrical ratios of Malthus saying that the latter contrasted with reality. According to
him, it was the inability to get work and not the means of subsistence that limited the rise of
population.
Economic Idea # 5. Machinery:
The classical writers considered the introduction of machinery beneficial because it increases
production and as a result, prices fall, demand for goods increases, which in turn means an
increased demand for labour and expansion of employment. Thus workers thrown out of the
work at the time of the introduction of machinery will now find work.
Sismondi was against inventions and machines because they lead to evil consequences.
His view was that the introduction of machinery reduces consumption and slackens demand.
Machinery produces beneficial results only when those who are unemployed as a result of its
introduction are ensured employment elsewhere. He also held the view that all inventions and
machines were not bad. The use of invention and machines was justified only when the demand
for consumption had surpassed production, so that increased production might benefit the poor
people.
These inventions and machines would benefit certain nations at the cost of others. In order to
save people from the exploitation of inventor countries he suggested that inventions should be
made known to all countries at the same time.
Economic Idea # 6. Distribution:
Sismondi strongly criticised the distribution theory of Ricardo. He said that the end as
postulated by the then economists, the largest possible production, did not necessarily coincide
with the end to which all activities should be desired.

4. The end was the achievement of greatest possible happiness of the people which could be
attained even with a small production which was well distributed. Thus, Sismondi emphasised
the need for proper distribution.
Sismondi recognised the existence of three classes of society – landed proprietors,
capitalists and day labourers.
They could receive for their services rent, profits and wages respectively. Sismondi made an
illogical distinction between the annual revenue and annual production and explained that the
revenue of the preceding year was spent on the purchase of the annual production. He wanted
an equilibrium between production and consumption and effective laws for the regulation of
distribution in the interests of the community.
Economic Idea # 7. Capital:
Sismondi considered that a capitalist industry was necessary for the material happiness
of the people. But he opposed concentration of wealth in the hands of a few. Everybody should
be enabled to enjoy capital.
He admitted that the nation’s capital was amassed by the capitalists and their hirelings and the
proletariate was left to suffer. He gave a comprehensive exposition of the law of capital
concentration which led to pauperism; and the separation of property from toil created evil
consequences.
Economic Idea # 8. Competition:
Sismondi criticised the classical view that competition, in general, was beneficial to the
people.
Competition is useful only when it provokes the producers to increase production in response
to an increase in demand. With stationary consumption, competition means race among the
producers for increasing sales by lowering prices. Prices can be lowered by reducing costs and
in their bid to reduce costs, the producers are inclined to cut wages and to employ children and
women workers and to lengthen the working hours.
Economic Idea # 9. Peasant Farming:
Sismondi was of the view that the benefits accruing from farming should go to the
peasants alone. He praised the efforts of the French peasants to improve the standard of
cultivation after their lands had been freed from the feudal lords. Sismondi favoured a small
scale cultivator who could cultivate his land according to his choices and skill and enjoy the
full benefits of his labour and industry.

5. Economic Idea # 10. Reform Projects:
Sismondi’s aim was to lay down the abuses of the capitalist system in actual life and to
demonstrate the necessity of state intervention. He thus became the first of the
interventionists.
He advocated state intervention to correct the immediate evils of the wage system and worker’s
misery.
Workers should be guaranteed the right of forming trade unions, there should be legal limitation
on working hours and guarantee of holidays and restrictions on the employment of children.
The employers should be made legally responsible for “Professional Guarantee”, a system of
insurance for workers, including unemployment, accident, sickness and old age benefits. The
financial burden was to fall wholly on the employers and not on the public exchequer. The
rapid multiplication of invention was opposed by Sismondi because he feared that it created
unemployment and economic crisis. He also opposed mechanised production and the large
scale production.
List of top two economists of Mathematical School:- 1. Augustine Cournot 2. Gossen.
Economist # 1. Augustine Cournot (1801-1877):
Cournot was the principal founder of the mathematical school. He was a famous French
economist who was the first to use Mathematics in this subject. In the opinion of Dr. Marshall,

6. Cournot’s genius must give a new mental activity to everyone who passes through his hands.
His main contribution, “Researches into the Mathematical Principles of the Theory of Wealth”
was first published in 1838.
The same book was republished, after omitting the algebraic part, in 1863 as Principles of the
Theory of Wealth and in 1876 as Review Summary of Economic Doctrines. His book was
recognised only after the publication of William Stanley Jevons’ The Theory of Political
Economy (1872) and Leon wairas’ Elements of Political Economy (1874), who pointed out the
virtues of his method in their books. Then he came to occupy a remarkable position in the
history of economic thought.
Economist # 2. Gossen (1810-1858):
Herman Heinrich Gossen is one of the most tragic figures in the history of economics. Gossen
was an anticipator of the marginal utility theory. He published his book “Development of the
Laws of Exchange among Men” in 1854.
He hoped that his book revolutionised the science of economics. He claimed that he was doing
to economics what Copernicus did for astronomy. But his ideas were never popular during his
life time. One main reason for that was his treatment of the subject was highly mathematical.
But Jevons and Menger praised the pioneering efforts made by Gossen in the development of
marginal utility theory.
Gossen’s analysis of economic system is based on Hedonism and Utilitarianism. According to
him everyman tries to maximise his pleasure and minimise his pain. In other words Gossen
believed that the aim of all human conduct is to maximise enjoyment.
Gossen believed that the confusion which existed in economic theories before his book was
published was due to the absence of mathematical representation. So, he held that a comparison
of the quantities of satisfaction might be made with the help of mathematical formulae. Based
on the above assumption he wrote in the first para of his book. “Man wants to enjoy life and
makes it his chief aim to maximise happiness”. In this connection he gave three laws of human
conduct
These three laws exhibit three main features:
(1) Utilitarianism, (2) Consumption approach and
(3) Mathematical method.
Understanding the Austrian School of Economics
What we know today as the Austrian school of economics was not made in a day. This school
has gone through years of evolution in which the wisdom of one generation was passed on to
the next. Though the school has progressed and incorporated knowledge from outside sources,
the core principles remain the same.
Carl Menger, an Austrian economist who wrote Principles of Economics in 1871, is considered
by many to be the founder of the Austrian school.

7. The title of Menger's book suggests nothing extraordinary, but its contents became one of the
pillars of the marginalism revolution.
Menger explained in his book that the economic values of goods and services are subjective in
nature, so what is valuable to you may not be valuable to your neighbor.
Menger further explained that with an increase in the number of goods their subjective value
for an individual diminishes.
This valuable insight lies behind the concept of what is called diminishing marginal utility.
Later on, Ludwig von Mises, another great thinker of the Austrian school, applied the theory
of marginal utility to money in his book, Theory of Money and Credit (1912).
The theory of diminishing marginal utility of money may, in fact, help us in finding an answer
to one of the most basic questions of economics: How much money is too much? Here also,
the answer would be subjective. One more extra dollar in the hands of a billionaire would
hardly make any difference, although the same dollar would be invaluable in the hands of a
pauper.
Other than Carl Menger and Ludwig von Mises, the Austrian school also includes other big
names like Eugen von Bohm-Bawerk,
Friedrich Hayek, and many others. Today's Austrian school is not confined to Vienna; its
influence spreads across the world.
Over the years, the basic principles of the Austrian school have given rise to valuable insights
into numerous economic issues like the laws of supply and demand, the cause of inflation, the
theory of money creation, and the operation of foreign exchange rates. On each of the issues,
the views of the Austrian school tend to differ from other schools of economics.
In the following sections, you can explore some of the main ideas of the Austrian school and
their differences with the other schools of economics.
UNIT-4
1) The following points highlight the top fourteen contributions of Alfred Marshall to
Economics. Some of the contributions are: 1. Definition and Laws of Economics 2.
Marshall Method 3. Wants and Their Satisfaction 4. Marshallian Utility and Demand 5.
Consumer’s Surplus 6. Elasticity of Demand 7. Supply and Cost 8. Factors of Production
and Others.
1. Definition and Laws of Economics:

8. Marshall defined Economics as, “Political Economy or Economics is a study of mankind in the
ordinary business of life; it examines that part of individual and social action which is most
closely connected with the attainment and with the use of material requisites of well-being.
Thus it is on the one side a study of wealth and on the other and more important side, a part of
the study of man.”
According to Marshall, Economics is a study of human beings and not of beasts or animals or
plants. It deals with the economic aspect of man and not social or political or religious aspect
of his life. It explains their ordinary business of life, which consists of earning and spending
money, for the satisfaction of their necessities of life like food, clothing and shelter.
Marshall classified human activities into activities that contribute to material welfare and
activities that do not contribute to material welfare. Marshall shifted the emphasis from wealth
to man. Wealth is only a means to welfare. Hence he has given primary importance to man and
secondary importance to wealth.
Economic laws are the statements of economic tendencies and are hypothetical. Since
economic laws deal with man’s actions which are numerous and uncertain, they are to be
compared with the laws of tides rather than with the simple and exact law of gravitation.
2. Marshall Method:
As far as the method of study is concerned, Marshall considered both induction and deduction
as useful for economics. Both are complementary to each other. He says, “Induction and
deduction are both needed for scientific thought as the left and right foot are both needed for
walking”.
Marshall was the great interpreter of the method of partial equilibrium. The forces influencing
an economic phenomenon are too numerous and it is very difficult to analyse all of them to
arrive at a complete explanation of the phenomenon. Therefore, the best method is to keep
other forces constant, and study the forces influencing the phenomenon. Thus all the other
forces are reduced to inaction by the phrase “other things being equal”.
3. Wants and Their Satisfaction:
Marshall fully analysed the characteristics of wants and distinguished between necessaries,
comforts and luxuries. He believed that consumption was the beginning and end of all
economic activities and so he discussed consumption first and production afterwards.
4. Marshallian Utility and Demand:

9. Price of a commodity is determined not by supply alone as the classical economists believed
and not by demand alone as the utility theorists believed but by both demand and supply curves.
Marshall takes up the theory of demand to analyse consumer behaviour.
A rational consumer aims at maximising satisfaction from his consumption. The amount of
satisfaction is closely related to the quantity of that commodity consumed by the consumer.
Thus demand is based on the law of diminishing marginal utility. Marshall stated the law thus,
“the additional benefit which a person derives from a given increase of the stock of a thing,
diminishes with every increase in the stock that he already has”.
Demand refers to the quantity of a commodity demanded at a certain price, other things
remaining the same. The individual demand curve can be directly derived from the law of
diminishing marginal utility. Assuming the marginal utility of money to be constant as the
satisfaction from the additional units of a commodity diminishes, the price offered to additional
units will fall. Hence the demand curve slopes downwards.
These individual demand curves can be added together to get market demand curve. The market
demand curve represents the total demand of all the consumers for a commodity at various
prices. On the basis of diminishing utility, Marshall has developed the law of substitution.
So far consumer behaviour has been analysed with reference to only one commodity. In
practical life, the consumer has to choose between more than one commodity. A rational
consumer will spend his money in such a way that his total satisfaction is maximum. He will
go on substituting one commodity for another till he gets maximum satisfaction.
5. Consumer’s Surplus:
Marshall added the term consumer’s surplus to economic literature. According to him, “The
excess of price which he would be willing to pay rather than go without the thing, over
that which he actually does pay, is the economic measure of this surplus satisfaction. It
may be called consumer’s surplus”.
The consumers are generally prepared to pay a higher price for a commodity rather than go
without it. But they actually pay less for it. As a result the consumer enjoys a surplus
satisfaction and it is known as consumer’s surplus. The concept of consumer’s surplus has
become the basis of welfare economics.
In the words of Eric Roll, “The whole field of welfare economics of which Marshall’s disciple
and successor, Prof. Pigou, is the founder, really rests on considerations of which the
consumers surplus doctrine is the intellectual ancestor”.

10. 6. Elasticity of Demand:
It is another important concept which Marshall gave to economics. In Marshall’s own words.
‘The elasticity of demand in a market is great or small according as the amount demanded
increases much or little for a given fall in price and diminish much or little for a given rise in
price.
He distinguished between five degrees of elasticity—absolutely elastic, highly elastic, elastic,
less elastic and inelastic. He laid down that the demand for luxuries was highly elastic, for
comforts elastic and for necessaries inelastic.
Elasticity of demand can be measured by the percentage change in the amount demanded/
percentage change in price. Generally, elasticity of demand refers to price elasticity. Marshall
was the first to define price elasticity of demand. Marshall gave three kinds of price elasticity—
unity, greater than unity and less than unit elasticity. He also enumerated the factors governing
elasticity of demand, viz., price level, nature of commodities, and variety of uses, substitutes,
time element, taste and habit.
7. Supply and Cost:
Marshall developed his theory of supply on the lines similar to his analysis of demand. Just as
the consumers obtain utilities or satisfaction from the consumption of commodities, it also
involves,costs. Just as the marginal utility diminishes as a consumer increased his consumption
of a commodity, the marginal cost rises as the production of a commodity expands.
A rational producer aims at minimising costs. The same equi marginal principle guides the
producer in the matters of resource allocation. Like the consumer, the producer too “has to
distribute his resources that they have the same marginal utility in each use; he has to weigh
the loss that would result from taking away a little expenditure here, with the gain that would
result from adding a little there”.
Marshall distinguished between real and money cost of production. Real cost of production
refers to the efforts and sacrifices involved in making a commodity. Real costs include the
exertion of labour and waiting for saving. Money cost of production indicates the sum of money
that have to be paid for these efforts and sacrifices.
Marshall divided costs into prime and supplementary costs. Prime cost are variable costs and
include wages and raw materials. Supplementary costs are fixed costs and include depreciation,
interest on loans, rent and salaries of executives. In the short run, a firm has to cover its prime
costs. But in the long run, a firm must cover both prime and supplementary costs.

11. 8. Factors of Production:
According to Marshall, land and labour are the two chief factors of production. Capital is the
secondary agent of production. Organisation is just a sort of labour. As a result, land and labour
are the primary factors of production. Man being active, is the central force behind all activities
relating to production and consumption, but nature plays a significant role as he is moulded by
his surroundings and environment.
9. Internal and External Economies:
Economies of scale are of two types—internal and external. Internal economies are those which
are dependent on the resources of the individual houses of business engaged in it, on their
organisation and the efficiency of their management.
Internal economies arise within a firm when its production increases. External economies are
external to a firm and accrue to it when the size of the industry expands. These economies are
important to understand the nature of long-run supply curve of an industry.
(a) Economy of materials or the utilisation of by-products.
(b) Economy of machinery:
(i) In a large establishment, there are often many expensive machines which a small
manufacturer cannot afford to use.
(ii) Larger machines are more efficient.
(iii) Small manufacturers are sometimes ignorant of the best types of machinery to use in their
business.
(iv) Small manufactures cannot undertake expensive experiments.
(c) Economy in bulk buying and selling:
(i) Larger firms secure discounts for purchasing in huge quantity.
(ii) Larger firm pays low freights and saves on carriage in many ways.
(iii) It is cheaper to sell in large quantities.
(d) Economy of skill:
(i) Each man can be assigned to the task for which he is best fitted and thereby can acquire
additional proficiency by repetition.

12. (e) Economy of finances. Larger firms secure credit on easier terms. Owing to these internal
economies, the long-run average costs fail as output rises. But, after a certain level of output,
average costs must rise due to growing managerial inefficiencies and marketing difficulties.
Thus, internal economies and diseconomies explain why the long-run average cost curve is U-
shaped.
10. Marshallian Theory of Value and Time Element:
On the basis of time element Marshall classified value into four kinds:
i. Market value,
ii. Short period value,
iii. Long period value and
iv. Secular value.
11. Representative Firm:
Marshall has defined a representative firm as one “which has had a fairly long life and fair
success, which is managed with normal ability and which has normal access to the
economies, external and internal, which belong to that aggregate volume of production
the conditions of marketing them and the economic environment generally”.
The firm will have the following characteristics:
(i) Representative firm will be an average firm. It has a fair amount of internal and external
economies.
(ii) It is neither declining nor increasing.
(iii) It’s management is neither very efficient nor inefficient.
(iv) It is neither old nor new.
(v) It is neither earning super normal profits nor incurring losses.
(vi) There can be more than one such firm.
12. Distribution:
According to Marshall, the theory of distribution is essentially a theory of factor pricing. The
price of factors is determined by market forces, viz., demand and supply. The demand for a
factor of production is a derived demand and depends on its marginal productivity. A producer

13. employs more and more of factors of production till its reward is equal to its marginal
productivity. Marshalls theory of distribution was essentially marginal productivity theory of
distribution.
13. Quasi-Rent:
Marshall introduced the concept of Quasi-rent in economic literature. “Quasi-rent is the income
earned from machines and other appliances for production made by man”. The quasi-rent is
the surplus earned by the instruments of production other than land.
14. Marshall’s Contribution to Monetary Economics:
Marshall’s book entitled Money, Credit and Commerce appeared in 1923 and his originality
appeared to be more modern in the field of monetary problems. He believed that the value of
money was a function of demand and supply. Marshall has also thrown light on the problem of
rising price. He made a distinction between real and money rate of interest. For the first time,
Marshall explained the causal process by which an increased money supply influences prices
and also the part played by the rate of discount was explained by him

14. Utility theory[edit | edit source]
The measurability of utility
Operational measurement of utility
The Bernoulli hypothesis
Gambling and insurance
The Bernoulli hypothesis and progressive taxation
Derivation of demand curves
The constancy of the marginal utility of money
Indifference-curve
Revealed preference
Marshallian demand curves
Subjective theory of value
Welfare economics
Consumer's surplus
Four consumer's surpluseS
Tax-bounty analysis
Cost and supply
The short run
Quasi-rents
The long run
External economies
Producers' surplus
Asymmetrical welfare effect
Representative firM
Monopolistic competition

15. In this article we will discuss about Irving Fisher (1867-1947):- 1. History of Irving Fisher
2. Economic Ideas of Irving Fisher 3. Critical Appraisal.
History of Irving Fisher:
Schumpeter called Irving Fisher the greatest economist of America in his “Ten Great
Economists”. Irving Fisher was a mathematician, statistician, reformer and a teacher. He was
a man of diverse interests. He took active part in several activities like campaign for
prohibition, public health, healthy living etc.
He was a great mathematician and used extensively mathematics in economics. His doctoral
dissertation was “Mathematical Investigation in the Theory of Value and Price”, published in
1892. Fisher was born in Saugerties (New York).
He was educated at Yale, Berlin and Paris. In 1893 he left for Europe for his higher studies in
Mathematics. After his return, he taught mathematics for some-time at the Yale University.
From 1895 onwards he was appointed as Professor of Economics.
Fisher’s other writings include:
The Nature of Capital and Income (1906) The Rate of Interest (1907), The Purchasing Power
of Money (1911), Elementary Principles of Economics (1910), The Making of Index Numbers
(1922), The Money Illusion (1928), The Theory of Interest (1930), Booms and Depressions
(1932), Stable Money (1934) and 100 percent Money (1935). Fisher’s main contributions are
in the fields of money, interest and capital. He was the first economist who said that income
should not be confused with capital.
Economic Ideas of Irving Fisher:
The following are the main economic ideas of Fisher:
1. Theory of Demand:
In his theory of demand, Irving Fisher adopted a cardinal utility analysis. Like Edgeworth, he
also developed the concept of indifference curves. He drew price and income lines. He also
mentioned about superior and inferior goods and the substitutability and complementarity
between goods. For example, when the goods are perfect substitutes, he found that the
indifference curves would become straight lines parallel to each other.
2. Capital:
In his book “The Nature of Capital and Income” Irving Fisher discussed about capital. He
maintained that capital and income could not be treated as abstract and unrealistic
concepts.They were derived from the realities of economic life. Capital was a fund while
income from it was a flow.

16. Accordingly the current value of capital was nothing but the discounted value of future income
from the capital. This way of looking of the current value of capital has been proved to be
useful in both theoretical and empirical studies. Keynesian marginal efficiency of capital is
based upon this approach.
3. Interest:
Fisher thought that the main problem in Economics was the determination of rate of interest.
For his analysis of interest, Fisher considered three factors namely, impatience or preference
for present goods, productivity and uncertainty and risk. Of these, impatience and productivity
determined the rate of interest. Here it should be noted that Fisher’s concept of productivity is
similar to Keynes’ marginal efficiency of capital.
Fisher emphasised that interest would not arise, if an individual was indifferent towards the
present. Interest arose on account of time preference. Thus Fisher integrated the time preference
and productivity theories of interest. Therefore his theory of interest was a non-monetary
theory. He did not distinguish between real and monetary rate of interest.
4. Quantity Theory of Money:
Transactions approach:
Fisher stated the theory as, “Quantity Theory asserts that (provided the velocity of circulation
and the volume of trade are unchanged) if we increase the number of dollars whether by
renaming coins or by debasing coins or by increasing coinage, price will be increased in the
same proportion”.
In order to explain the direct and proportionate relation between quantity of money and price
level, Fisher gave an equation of exchange. The original equation of exchange was
PT = MV (or) P = MV/T
In which ‘P’ stands for the price level, ‘M’ quantity of money and T for transactions.
But the later critics criticised this original equation, for not including credit money. So Fisher
presented a modified equation of exchange by including credit money.
PT = MV + M1
V1
(or) P = MV + M1
V1
/T
In which M and V stand for metallic money and its velocity of circulation. M1
and V1
for credit
money and its velocity of circulation.
Fisher based his quantity theory of money on certain assumptions. He assumed that the velocity
of circulation of money and volume of trade to remain unchanged.

17. Further he mentioned certain factors that determined the velocity of circulation of
money. They were:
(1) System of payment
(2) Development of credit and finance
(3) The speed with which money is transported
(4) Community’s consumption and saving habits
(5) Expectation regarding future incomes and prices of goods and services.
Fisher pointed out that in economically backward countries, the velocity of circulation of
money was low. So in order to increase the velocity, Fisher suggested that the people should
not hoard their savings but invest them in productive channels.
Fisher’s quantity theory of money has been criticised. Some of the criticisms are:
(1) It did not explain the changes in the value of money.
(2) The price level depends on certain non-monetary factors also.
(3) The theory did not treat the problem dynamically.
(4) The equation did not differentiate between cash deposits and saving deposits.
(5) The theory failed to explain the price movements in war times.
Compensated standard:
In order to compensate the changes in the purchasing power of money, Fisher suggested a
compensated dollar. Compensated dollar means, the metallic content of the dollar should
change in proportion to the changes in the price level. For example, if the price level rose by
10 percent, it meant that the purchasing power of a dollar had fallen by 10 percent. So to
compensate this, the metallic content of the dollar should be increased by the same percentage.
Currency principle:
In his book “100 Percent Money”, Fisher suggested this currency principle for the banks. He
said the banks could follow this principle, in accordance with, the banks were required to
maintain 100 percent resources against deposits. They could not expand the currency unless
fully backed by cash. But there were certain practical difficulties in the implementation of the
plan.

18. Theory of business cycles:
According to Fisher, the main cause for business fluctuations was the changes in credit. He
said business depressions were merely the “dances of the dollar”. Fisher suggested that in order
to lift the economy from depression, prompt action in the form of reflation should be taken by
the central bank.
Critical Appraisal of Irving Fisher:
Irving Fisher was a pioneer in the field of econometrics. He opposed laissez faire and pleaded
for an equitable distribution of income. Schumpeter says his Theory of Interest is a peak
achievement of the literature of interest. Unfortunately he had large number of pupils but no
disciples. He did not found a school. So there have been many Ricardians, Marshallians, and
Keynesians but no Fisherians.