The Theory

Abstract

By the Great Depression, Fisher’s theory of savings and investment had prevailed for a generation. He saw savings and investments as two sides of the same equation. One represented savings and consumption deferred today to provide for more consumption tomorrow. The other was savings directed toward the creation of future capacity to produce and thus to fuel tomorrow’s consumption. Technically, inventories also represented investment. However, this balance between inventory and capacity was, in Fisher’s words, “managed by captains of industry” who understood the workings of the modern economy better than anyone who had come before them.⁸¹