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Hubris, Nemesis, and Analysis: “Stock Prices Appear to Have Reached a Permanently High Plateau”

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Irving Fisher

Part of the book series: Great Thinkers in Economics ((GTE))

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Abstract

Hubris, Nemesis, and Analysis: In the 1920s Irving Fisher made a fortune of ten million dollars in the stock market, of which he then lost eleven million, which in the words of John Kenneth Galbraith was “a sizeable sum, even for an economics professor.” Arguing correctly that fluctuations in the purchasing power of money meant that money was not a riskless asset, and that the mistaken perception that government bonds were thus riskless assets unlike stocks would lead to underpricing of stocks relative to bonds, Fisher fervently, memorably and quotably advocated investment in stocks: he famously said that “Stock prices appeared to have reached a permanently high plateau” in October 1929, at the start of an 85% decline in stock prices over three years. Edward Prescott and Ellen McGrattan have controversially argued that, given available statistics, Fisher was justified in his optimism about stock prices; less controversially, Kathryn Dominguez et al. (American Economic Review 78:595–612, 1988) argue that Fisher could not have predicted the policy mistakes that transformed a cyclical downturn into the Great Depression.

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Notes

  1. 1.

    Galbraith (1977, p. 195) added that “What is now called the Keynesian Revolution began with Irving Fisher. This Keynes himself affirmed. Writing to Fisher in 1944, he referred to him as one of his earliest teachers on these matters.” See also Dimand (1995).

  2. 2.

    Had Fisher stepped in front of a bus in the summer of 1929, he would now be cited as an example of how an ivory-tower economist could prosper in the financial world, like Keynes , who made three fortunes and only lost two.

  3. 3.

    As the opportunity cost of holding money soared, demand for real money balances M/P collapsed, but Reichsbank president Dr. Rudolf Havenstein promised that, with 38 new high-speed printing presses, the Reichsbank would print money fast enough to catch up with the price level.

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  1. Department of Economics, Brock University, St. Catharines, ON, Canada

    Robert W. Dimand

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Dimand, R.W. (2019). Hubris, Nemesis, and Analysis: “Stock Prices Appear to Have Reached a Permanently High Plateau”. In: Irving Fisher. Great Thinkers in Economics. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-05177-8_7

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  • DOI: https://doi.org/10.1007/978-3-030-05177-8_7

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