EconTalk: Russ and I discuss Fisher's Debt-Deflation Theory
By Garett Jones
As always, I enjoyed the hour. Hope you do as well.
I suspect it was this post that led to the invitation. I really do believe Fisher’s 1933 Econometrica article offers a more complete model of the entire business cycle process than anything in Keynes’s General Theory.
It took Hicks, Alvin Hansen, and other interpreters to translate the General Theory into a complete model, one where you could intuitively understand who was making which decisions, how it all added up to a complete economy where everyone was being at least modestly rational.
Fisher, by contrast, implicitly tells you: “Just take your old, familiar classical model, perfectly flexible wages and prices, but add in just this one thing: Debt contracts that are tough to get out of.” Then he shows the the consequences of that one tweak. They are not small.