The Economic Mind in America: Essays in the History of American Economics

By Malcolm Rutherford | Go to book overview

9

THE QUEST FOR AN IDEAL INDEX

Irving Fisher and The Making of Index Numbers1

Robert W. Dimand

INTRODUCTION

Measuring movements in the general level of prices was crucial for Irving Fisher’s monetary economics. His distinction between real and nominal interest rates depended on changes in the general price level. His statement in The Purchasing Power of Money (Fisher 1913) of the quantity theory of money, holding that, other things being equal, a change in the quantity of money leads in the long run to a change in the price level of the same proportion, also depends on the concept and measurement of an index of the average level of prices, as did his educational campaign to eradicate money illusion. His compensated dollar proposal called for stabilization of an index of commodity prices. The gold standard, the policy rule which Fisher’s compensated dollar plan was intended to replace, created no comparable need for calculation of a price index. Fisher’s schemes for neutralizing monetary shocks by indexation, such as the indexed bond that he persuaded Remington Rand to issue in the 1920s or the indexation of his secretary’s weekly pay, also depended on a price index. Fisher drew on his great energy and determination in his effort to decide upon and calculate an ideal index number for prices, along with the corresponding index for quantities. Although Fisher had predecessors whom he generously acknowledged (notably Edgeworth and Walsh, who shared the dedication of The Making of Index Numbers (Fisher 1922)), Arthur Vogt (Vogt and Barta 1997) rightly states that one may call Fisher’s The Purchasing Power of Money the old testament and The Making of Index Numbers the new testament of statistical index theory.

The test approach to the statistical theory of index numbers, to which Fisher (1913, 1922) and Walsh (1901, 1921) contributed, sought to find an index number formula that would satisfy a list of statistical criteria. Walsh introduced the proportionality test, which Fisher included in a more

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